Question

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

Price per cake	$	14.81
Variable cost per cake
Ingredients		2.34
Direct labor		1.03
Overhead (box, etc.)		0.21
Fixed cost per month	$	4,042.80

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 $1.90 per cake.



b. Fixed costs increase by $525 per month.



c. Variable costs decrease by $0.35 per cake.



d. Sales price decreases by $0.70 per cake.



2. Assume that Cove sold 380 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 12 percent increase in sales revenue. (Round your final answer to 2 decimal places (i.e. .1234 should be entered as 12.34%.))

Answer 1

1.

Breakeven point = Fixed cost / Contribution margin per cake

a. Sales price increases by $1.90 per cake:

Variable cost per cake = $2.34 + $ 1.03 + $0.21

= $3.58

Contribution margin per cake = Sales - Variable cost

= ($14.81 + $1.90) - $3.58

= $13.13

Break even point = $4042.80 / $13.13 = 307.905

= 308 cakes

b. Fixed costs increase by $525 per month:

Contribution margin per unit = $14.81 - $3.58 = $11.23

Breakeven point = ($4,042.80 + $525) / $11.23 = 406.749

= 407 cakes

c. Variable costs decrease by $0.35 per cake:

Contribution margin per unit = $14.81 - [ $3.58 - $0.35]

= $11.58

Breakeven point = $4,042.80 / $11.58 = 349.119

= 349 cakes

d. Sales price decreases by $0.70 per cake:

Contribution margin per cake = ($14.81 - $0.70) - $3.58 = $10.53

Break even point = $4,042.80 / $10.53 = 383.931

= 384 cakes

2. Degree of operating leverage:

Total Contribution margin = 380 cakes * $11.23 = $4,267.40

Fixed costs = $4,042.80

Net operating income = Contribution - Fixed costs

=$4,267.40 - $4,042.80

= $224.6

Degree of operating leverage = Contribution / Net operating income

= $4,267.40 / $224.6

= 19

3.

Degree of operating leverage = % change in profit / % change in sales

19 = % change in profit / 12%

% change in profit = 228%

Change in profit = 2.28