Question

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

Price per cake	$	13.91
Variable cost per cake
Ingredients		2.19
Direct labor		1.14
Overhead (box, etc.)		0.28
Fixed cost per month	$	3,399.00

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 $1.80 per cake.



b. Fixed costs increase by $480 per month.



c. Variable costs decrease by $0.40 per cake.



d. Sales price decreases by $0.30 per cake.



2. Assume that Cove sold 350 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 6 percent increase in sales revenue. (Round your final answer to 2 decimal places (i.e. .1234 should be entered as 12.34%.))

Answer 1

	price per cake				13.91
	Variable cost per cake
	ingredients			2.19
	Direct labor			1.14
	overhead			0.28	3.61
	Contribution margin per cake				10.3
	Break even point(units) = fixed cost/contribution margin per unit
1a)	when sale increases by $1.80 per cake
	contribution will also increase by the same amount
		3,399/(10.3+1.8)
	BEP	281	Cakes	answer
b)	fixed cost increase by 480 per month
	(3399+480)/10.3
	377
	BEP	377	Cakes	answer
c)	Variable cost decrease by 0.40 per caje
	leading to increase in contribution
	(3399/(10.3+.4)
	318
	BEP	318	Cakes	answer
d)	when sale decreases by $.30 per cake
	contribution will also decrease by the same amount
		3399/(10.3-.3)
	BEP	340	Cakes	answer
2)	contibution (350*10.30)=			3605
	less fixed cost			-3399
	net income			206
	degree of operating leverage = contribution/net income
				3605/206
				17.5000
3)	Effect on profit =		increase of sales revenue *degree of operating leverage
			6%*17.5
			105	%
	Effect on profit		105%