Question

Price per cake $ 14.21 Variable cost per cake Ingredients 2.33 Direct labor 1.14 Overhead (box, etc.) 0.12 Fixed cost per month $ 2,973.60 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 $1.70 per cake. b. Fixed costs increase by $475 per month. c. Variable costs decrease by $0.43 per cake. d. Sales price decreases by $0.70 per cake. 2. Assume that Cove sold 305 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

Answer:-

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

Here we need to findout the break even point .

a :-

Here we need to findout the break even point .

Variable cost per cake = Ingredients + Direct labor + Overhead (box, etc.)

= 2.33 + 1.14 + 0.12

= $3.59

Variable cost per cake =   $3.59

Break even point = Fixed cost per month /  Contribution margin per cake

= 2,973.60 / [ [ $14.21 +  $1.70 ] - $3.59 ]

= 2,973.60 / [ 15.91 - 3.59 ]

= 2,973.60 / 12.32

= 241.36

Break even point = 241 cakes

(b) :-

Here we need to findout the break even point .

Breakeven point = Fixed costs / Contribution margin per unit

= [ $2,973.60 + $475 ] / [ 14.21 - $3.59 ]

= 3,448.60 / 10.62

= 324.72

Breakeven point = 325 cakes

( c ):-

Here we need to findout the break even point .

Breakeven point = Fixed costs / Contribution margin per unit

= 2,973.60 / [ 14.21 - [ $3.59 - $0.43 ] ]

= 2,973.60 / [ 14.21 - 3.16 ]

= 2,973.60 / 11.05

= 269.10

Breakeven point = 269 cakes

( d ) :-

Here we need to findout the break even point .

Breakeven point = Fixed costs / Contribution margin per unit

= 2,973.60 / [ [ 14.21 - $0.70 ] - 3.59 ]

=  2,973.60 / [ 13.51 - 3.59 ]

= 2,973.60 / 9.92

= 299.75

Breakeven point = 300 cakes

2. Assume that Cove sold 305 cakes last month. Calculate the company’s degree of operating leverage.

Here we need to findout the degree of operation leverage.

Degree of operating leverage = Contribution margin / Net operating income

where ,

Contribution margin = [  305 cakes * [ 14.21 - 3.59 ]

= 305 * 10.62   

= $3,239.1

Contribution margin = $3,239.1

Now,

Degree of operating leverage = $3,239.1 / [ $3,239.1 - 2,973.60 ]

= $3,239.1 / 265.5

= 12.20

Degree of operating leverage = 12.20

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 :-

Here we need to findout the change in profit.

Change in profit = Degree of operating leverage * change in sales

= 12.2 * 6%

= 73.20%

%Change in profit = 73.20%

Change in profit = 0.73