Question

Price per cake	14.51
Variable cost per cake
ingredients	2.31
direct labor	1.13
overhead	0.15
fixed cost per month	5,132.40

Using the degree of operating leverage, calculate the change in profit caused by a 14 percent increase in sales revenue. (Round your intermediate values to 2 decimal places. (i.e. 0.1234 should be entered as 12.34%.)). I NEED THIS RIGHT BADLY!!

. Calculate Cove’s new break-even point under each of the following independent scenarios: a. Sales price increases by $1.90 per cake. b. Fixed costs increase by $530 per month. c. Variable costs decrease by $0.33 per cake. d. Sales price decreases by $0.60 per cake. 2. Assume that Cove sold 495 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 14 percent increase in sales revenue.

Answer 1

Ans.	Current situation:
	Price per cake	$14.51
	Less: Variable cost per cake
	Ingredients	$2.31
	Direct labor	$1.13
	Overhead	$0.15
	Total variable cost per cake	$3.59
	Contribution margin per cake	$10.92
Ans. A	New selling price ($14.51 + $1.90) =   $16.41
	New contribution margin = New selling price - Total variable cost per cake
	$16.41 - $3.59
	$12.82
	Break even point in unit sales =   Fixed cost / New contribution margin
	$5,132.40 / $12.82
	400.34	units
Ans. B	New fixed cost ($5,132.40 + $530) = $5,662.4
	Break even point in unit sales =   New Fixed cost / Contribution margin
	$5,662.4 / $10.92
	518.53	units
Ans. C	New variable cost ($3.59 - $0.33) = $3.26 per unit
	New contribution margin ($14.51 - $3.26)   = $11.25 per unit
	Break even point in unit sales =   Fixed cost / New contribution margin
	$5,132.40 / $11.25
	456.21	units
Ans. D	New selling price ($14.51 - $0.60) =   $13.91
	New contribution margin = New selling price - Total variable cost per cake
	$13.91 - $3.59
	$10.32
	Break even point in unit sales =   Fixed cost / New contribution margin
	$5,132.40 / $10.32
	497.33	units
Ans. 2	Contribution margin ($10.92 * 495)	$5,405.40
	Less: Fixed cost	$5,132.40
	Net income	$273.00
	Degree of operating leverage    =   Contribution margin / Net income
	$5,405.40 / $273
	19.80
Ans. 3	Percentage change (increase) in net income = Operating leverage * Increase in revenue
	19.80 * 14%
	277.20%
	Change in net income (dollar value)   =   Current net income * Percentage change in net income
	$273 * 277.20%
	$756.76
	New net income (after increase in sales) = Current net income + Change in net income
	$273 + $756.756
	$1,029.76