Question

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

Price per cake	$	14.21
Variable cost per cake
Ingredients		2.18
Direct labor		1.16
Overhead (box, etc.)		0.28
Fixed cost per month	$	4,130.10

Required:

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

a. Sales price increases by $1.70 per cake.

b. Fixed costs increase by $460 per month.

c. Variable costs decrease by $0.44 per cake.

d. Sales price decreases by $0.20 per cake.

2. Assume that Cove sold 420 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 6 percent increase in sales revenue.

• Required 1
• Required 2
• Required 3

Calculate Cove’s new break-even point under each of the following independent scenarios: (Round your answers to the nearest whole number.)
a. Sales price increases by $1.70 per cake.
b. Fixed costs increase by $460 per month.
c. Variable costs decrease by $0.44 per cake.
d. Sales price decreases by $0.20 per cake.

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	Break-Even Point 1a. Sales price increases by $1.70 per cake cakes 1b. Fixed costs increase by $460 per month cakes 1c. Variable costs decrease by $0.44 per cake. cakes 1d. Sales price decreases by $0.20 per cake cakes

• Required 2
• Required 3

Assume that Cove sold 420 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

• Required 3

Using the degree of operating leverage, calculate the change in profit caused by a 6 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

Requirement 1:

	Original data	a	b	c	d
Selling Price	$         14.21	$             15.91	$             14.21	$             14.21	$             14.01
Variable Cost	$           3.62	$               3.62	$               3.62	$               3.18	$               3.62
Contribution Margin	$         10.59	$             12.29	$             10.59	$             11.03	$             10.39
Fixed Cost	$   4,130.10	$        4,130.10	$        4,590.10	$        4,130.10	$        4,130.10
Breakeven point	390.00	336.05	433.44	374.44	397.51
Breakeven point (Rounded off)	390.00	336.00	433.00	374.00	398.00

Break even point = Fixed Cost / Contribution margin per unit

Requirement 2:

Degree of Operating Leverage = (Quantity * Contribution Margin) / [(Quantity * Contribution Margin) - Fixed Cost]

= (420 cakes * $10.59) / [(420 cakes * $10.59) - $4,130.10]

= $4,447.80 / ($4,447.80 - $4,130.10)

= $4,447.80 / $317.70

= 14

This means that every 1% change in sale will change the net operating income by 14%.

Requirement 3:

DOL = 14

Increase in Sales Revenue = 6%

Change in Profit = Increase in Sale Revenue * DOL

= 6% * 14

= 84%