Question

Cove’s Cakes is a local bakery. Price and cost information follows:

Price per cake	$	14.51
Variable cost per cake
Ingredients		2.30
Direct labor		1.14
Overhead (box, etc.)		0.25
Fixed cost per month	$	3,462.40

Required:

1. Determine Cove’s break-even point in units and sales dollars.

2. Determine the bakery’s margin of safety if it currently sells 420 cakes per month.

3. Determine the number of cakes that Cove must sell to generate $1,800 in profit.

Answer 1

1	Break-even units                       [Refer working note 1]	320	cakes
	Break-even sales dollars          [Refer working note 2]	$4,643.15
2	Margin of safety                         [Refer working note 5]	$1,451
3	Target sales units                       [(Fixed cost + Targer profit) / Contribution margin per unit = ($3,462.40 + $1,800) / $10.82]	$486

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Working note 1 - Break -Even units

Fixed costs	/	Contribution margin per unit [Refe working note 3]	=	Break -Even units
$3,462.40	/	$10.82	=	320	units

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Working note 2 - Break - Even sales dollars

Fixed cost	/	Contribution margin ratio [Refe working note 4]	=	Break - Even sales dollars
$3,462.40	/	74.57%	=	$4,643.15

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Working note 3 - Contribution margin per unit
Sales per cake	$14.51	per cake
Less: Variable cost per cake                    [$2.30 + $1.14 + $0.25]	$3.69	per cake
Contribution margin per cake	$10.82	per cake

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.Working note 4 - Contribution margin ratio

Contribution margin per unit	/	Sales per unit	=	Contribution margin ratio
$10.82	/	$14.51	=	74.57%

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Working note 5 - Margin of safety
Sales                                                         [Unit sales x Selling price per unit = 420 cakes x $14.51 per cake]	$6,094.20
Less: Break even sales dollars              [Break even units x Selling price per unit = 320 cakes x $14.51 per cake]	$4,643.20
Margin of safety	$1,451