Question

Cove's Cakes is a local bakery. Price and cost information follows: $ 17.00 Price per cake Variable cost per cake Ingredients Direct labor Overhead (box, etc.) Fixed cost per month 2.50 1.40 0.20 $3,850.00 Required: 1. Calculate Cove's new break-even point under each of the following independent scenarios: (Round your answer to the nearest whole number.) a. Sales price increases by $1.00 per cake. Break-Even Point - cakes b. Fixed costs increase by $500 per month Break-Even Point cakes c. Variable costs decrease by $0.35 per cake. Break-Even Point cakes

Answer 1

1 (a)

Sales price = 17 + 1

= $18 per cake

Total Variable cost = 2.50 + 1.40 + 0.20

= $4.10 per cake

Contribution margin = Sales price - Variable cost

= 18 - 4.10

= $13.90 per cake

Break even point = Fixed cost/Contribution margin

= 3,850/13.90

= 277 cakes

1 (b)

Fixed cost = 3,850 + 500

= $4,350

Variable cost = 2.50 + 1.40 + 0.20

= $4.10 per cake

Contribution margin = Sales price - Variable cost

= 17 - 4.10

= $12.90 per cake

Break even point = Fixed cost/Contribution margin

= 4,350/12.90

= 337 cakes

1 (c)

Variable cost = 4.10 - 0.35

= $3.75 per cake

Contribution margin = Sales price - Variable cost

= 17 - 3.75

= $13.25 per cake

Break even point = Fixed cost/Contribution margin

= 3,850/13.25

= 291 cakes

1 (d)

Sales price = 17 - 0.50

= $16.50 per cake

Variable cost = 2.50 + 1.40 + 0.20

= $4.10 per cake

Contribution margin = Sales price - Variable cost

= 16.50 - 4.10

= $12.40 per cake

Break even point = Fixed cost/Contribution margin

= 3,850/12.40

= 310 cakes

2.

Income statement

Sales (400 x 17)	6,800
- Variable cost (400 x 4.10)	- 1,640
Contribution	5,160
- Fixed cost	- 3,850
EBIT	1,310

Degree of operating leverage = Contribution/EBIT

= 5,160/1,310

= 3.94

3.

Degree of operating leverage = % change in EBIT/% change in sales

3.94 = % increase in EBIT/10%

Hence, % increase in EBIT = 39.4%

Hope this helped ! Let me know in case of any queries.