Question

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

Price per cake	$	13.91
Variable cost per cake
Ingredients		2.26
Direct labor		1.12
Overhead (box, etc.)		0.22
Fixed cost per month	$	4,536.40

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 $1.30 per cake.



b. Fixed costs increase by $485 per month.



c. Variable costs decrease by $0.41 per cake.



d. Sales price decreases by $0.40 per cake.



2. Assume that Cove sold 460 cakes last month. Calculate the company’s degree of operating leverage. (Do not round intermediate calculations. Round your answer to 2 decimal places.)



3. Using the degree of operating leverage calculated in Requirement 2, calculate the change in profit caused by a 10 percent increase in sales revenue. (Round your final answer to 2 decimal places (i.e. .1234 should be entered as 12.34%.))

Answer 1

Answer

• Requirement 1

A	Price per cake	$                    15.21
B	Total variable cost per cake	$                       3.60
C = A - B	Contribution margin per cake	$                    11.61
D	Fixed Cost	$              4,536.40
E = D/C	Break Even point	391	Answer [a]
A	Price per cake	$                    13.91
B	Total variable cost per cake	$                       3.60
C = A - B	Contribution margin per cake	$                    10.31
D	Fixed Cost	$              4,721.40
E = D/C	Break Even point	458	Answer [b]
A	Price per cake	$                    13.91
B	Total variable cost per cake	$                       3.19
C = A - B	Contribution margin per cake	$                    10.72
D	Fixed Cost	$              4,536.40
E = D/C	Break Even point	423	Answer [c]
A	Price per cake	$                    13.51
B	Total variable cost per cake	$                       3.60
C = A - B	Contribution margin per cake	$                       9.91
D	Fixed Cost	$              4,536.40
E = D/C	Break Even point	458	Answer [d]

• [2]

A	Price per cake	$                    13.91
B	Total variable cost per cake	$                       3.60
C = A - B	Contribution margin per cake	$                    10.31
D	Total cakes sold	460
E = C x D	Total Contribution margin	$              4,742.60
F	Fixed Cost	$              4,536.40
G = E - F	Net Income	$                  206.20
H = E/G	Degree of Operating Leverage	23.00	Answer

• [3]

A	Change in Sales Revenue	10%
B	Degree of Operating Leverage	23
C = A x B	Effect on Profits	230.00%	Answer