Question
In: Accounting
E6-4 Analyzing Changes in Price, Cost Structure, Degree of Operating Leverage [LO 6-4, 6-5] Cove’s Cakes...
E6-4 Analyzing Changes in Price, Cost Structure, Degree of Operating Leverage [LO 6-4, 6-5]
Cove’s Cakes is a local bakery. Price and cost information
follows:
| Price per cake | $ | 14.31 | |
| Variable cost per cake | |||
| Ingredients | 2.33 | ||
| Direct labor | 1.11 | ||
| Overhead (box, etc.) | 0.19 | ||
| Fixed cost per month | $ | 3,524.40 | |
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 $1.50 per cake.
b. Fixed costs increase by $475 per month.
c. Variable costs decrease by $0.25 per
cake.
d. Sales price decreases by $0.40 per cake.
2. Assume that Cove sold 355 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%.))
Solutions
Expert Solution
| Answers for the situation | A | B | C | D | |||||||
| Calculation of BEP | Per Unit | Working | Sales Price increase by $1.5 per cake | Working | Fixed cost increased by $475 | Working | Variable cost is Decreased by 0.25 per cake | Working | Sales price decreased by $0.4 | Working | |
| Selling price | 14.31 | 15.81 | 14.31+1.5 | 14.31 | 14.31 | 13.91 | 14.31-.40 | ||||
| Less Variable cost | |||||||||||
| Ingredients | 2.33 | 2.33 | 2.33 | 2.33 | 2.33 | ||||||
| Direct Labor | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | ||||||
| Over Heads | 0.19 | 0.19 | 0.19 | 0.19 | 0.19 | ||||||
| Total variable cost | 3.63 | 2.33+1.11+0.19 | 3.63 | 2.33+1.11+0.19 | 3.63 | 2.33+1.11+0.19 | 3.38 | 2.33+1.11+0.19-0.25 | 3.63 | 2.33+1.11+0.19 | |
| Contribution =Sales less variable cost | 10.68 | 14.31-3.63 | 12.18 | 15.81-3.63 | 10.68 | 14.31-3.63 | 10.93 | 14.31-3.38 | 10.28 | 13.91-3.63 | |
| BEP=Fixed cost divided by Contribution per unit | 330 | 3524.4/10.68 | 289 | 3524.4/12.18 | 374 | 3999.4/10.68 | 322 | 3524.4/10.93 | 343 | 3524.4/10.28 | |
| BEP is 330 Cakes | |||||||||||
| Fixed cost | 3524.4 | 3524.4 | 3999.4 | 3999.4 | 3524.4 | 3524.4 | |||||
| 355 units | |||||||||||
| 2 | Contribution =Sales less variable cost | 10.68 | 14.31-3.63 | ||||||||
| Contribution = sales units multiplied with Contribution per unit | 3791.4 | 355 units X $10.68 | |||||||||
| Fixed cost | 3524.4 | ||||||||||
| EBIT= Contribution less Fixed cost | 267 | 3791.4-3524.4 | |||||||||
| Operating leverage= Contribution divided by EBIT | 14.2 | 3791.4/267 | |||||||||
| Operating leverage will be 14.2 or 1420% | |||||||||||
| 3 | Contribution =Sales less variable cost | 11.54 | 14.31+0.86-3.63 | 0.86 per unit(14.31 X 6/100) | |||||||
| Contribution = sales units multiplied with Contribution per unit | 4096.7 | 355 units X $11.54 | |||||||||
| Fixed cost | 3524.4 | ||||||||||
| EBIT= Contribution less Fixed cost | 572.3 | 3791.4-3524.4 | |||||||||
| Operating leverage= Contribution divided by EBIT | 7.16 | 4096.7/572.3 | |||||||||
| Operating leverage will be 7.16 or 716% | |||||||||||
| due to change in the 6% revenue leads to change in contribution by 8.05% that is (572.3-267)/3791.4 |
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