Question

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

Price per cake	$	13.51
Variable cost per cake
Ingredients		2.22
Direct labor		1.16
Overhead (box, etc.)		0.16
Fixed cost per month	$	4,586.20

1. Calculate Cove’s new break-even point under each of the following independent scenarios:

a. Sales price increases by $1.90 per cake.

b. Fixed costs increase by $550 per month.

c. Variable costs decrease by $0.25 per cake.

d. Sales price decreases by $0.60 per cake.

2. Assume that Cove sold 480 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 14 percent increase in sales revenue.

1.
	Break-Even Point 1a. Sales price increases by $1.90 per cake cakes 1b. Fixed costs increased by $550 per month cakes 1c. Variable costs decrease by $0.25 per cake. cakes 1d. Sales price decreases by $0.60 per cake cakes

2. Assume that Cove sold 480 cakes last month. Calculate the company’s degree of operating leverage. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

	Degree of Operating Leverage

3. Using the degree of operating leverage, calculate the change in profit caused by a 14 percent increase in sales revenue. (Round your intermediate values to 2 decimal places. (i.e. 0.1234 should be entered as 12.34%.))

	Effect on Profit

Answer 1

1.
	Break-Even Point 1a. Sales price increases by $1.90 per cake 386 cakes 1b. Fixed costs increased by $550 per month 515 cakes 1c. Variable costs decrease by $0.25 per cake. 449 cakes 1d. Sales price decreases by $0.60 per cake 489 cakes

2. Assume that Cove sold 480 cakes last month. Calculate the company’s degree of operating leverage. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

24	Degree of Operating Leverage

3. Using the degree of operating leverage, calculate the change in profit caused by a 14 percent increase in sales revenue. (Round your intermediate values to 2 decimal places. (i.e. 0.1234 should be entered as 12.34%.))

336%	Effect on Profit

Detailed workings:

Price per cake	$	13.51
Variable cost per cake
Ingredients		2.22
Direct labor		1.16
Overhead (box, etc.)		0.16
Contribution margin		9.97

break even = fixed cost/contribution per unit

1a)	when sale increases by $1.90 per cake
	contribution will also increase by the same amount
		4,586.20/(9.97+1.90)
	BEP	386 cakes
b)	fixed cost increase by 550 per month
		(4,586.20+550)/9.97
	BEP	515 cakes
c)	Variable cost decrease by 0.25 per cake
	leading to increase in contribution
		(4,586.20)/(9.97+0.25)
		449 cakes
d)	when sale decreases by $0.60 per cake
	contribution will also decrease by the same amount
		4,586.20/(9.97-0.6)
		489 cakes
2)	contribution (480 * 9.97) =	4,785.60
	less fixed cost	4,586.20
	net income	199.40
	degree of operating leverage = contribution/net income
		4,785.60 / 199.40
		24
3)	Effect on profit:
	increase of sales revenue *degree of operating leverage
		24*14%
		3.36
	Effect on profit	336%