Question

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

Price per cake	$14.71
Variable cost per cake
Ingredients	2.27
Direct Labor	1.03
Overhead	0.20
Fixed cost per month	$4596.10

2. Assume that Cove sold 430 cakes last month. Calculate the company's degree of operating leverage.

3. Using the degree of operating leverage, calculate the change in profit caused by a 7% increase in sales revenue.

Answer 1

2. Calculation of Degree of Operating Leverage:

Cakes Sold = 430

Particulars	Amount ($)	Calculations
Sales	6325.3	430 Cakes * $14.71
Less: Variable Costs
Ingredients	976.1	430 Cakes * $2.27
Direct Labour	442.9	430 Cakes * $1.03
Overhead	86	430 Cakes * $0.20
Contribution	4820.3
Less: Fixed Cost	4596.1
EBIT	224.2

Degree of Operating Leverage = Contribution / EBIT = $4820.3 / $224.2 = 21.5

3. Change in Profit caused by a 7% Increase in Sales Revenue:

Change in Profit = Increase in Sales Revenue * Degree of Operating Leverage = 7% * 21.5 = 150.5%