Question

E6-3 Determining Break-Even Point, Target Profit, Margin of Safety [LO 6-1, 6-2, 6-3]

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

Price per cake	$	14.51
Variable cost per cake
Ingredients		2.16
Direct labor		1.07
Overhead (box, etc.)		0.12
Fixed cost per month	$	4,240.80

Required:
1. Determine Cove’s break-even point in units and sales dollars. (Round your Break-Even Units answer to the nearest whole number. Round your other intermediate calculations and sales dollars answer to 2 decimal places.)

   

2. Determine the bakery’s margin of safety if it currently sells 440 cakes per month. (Round your intermediate calculations to 2 decimals. Round the break-even units and final answer to nearest whole dollar.)

   

3. Determine the number of cakes that Cove must sell to generate $2,500 in profit. (Round your intermediate calculations to 2 decimal places and final answer to nearest whole number.)

Answer 1

1.break even point in units and dollars.

break even point in units = fixed cost / contribution per unit

here,

fixed cost $4,240.80

contribution per unit =price - variable costs

=>14.51-2.16-1.07-0.12

=>$11.16.

break even point in units = $4240.80/11.16

=>380 units.

break even point in dollars = fixed cost / PV ratio

here, PV ratio = contribution per unit / sale price per unit

=>$11.16/14.51

=>76.91%......(to two decimal places)

=>break even sales in dollars= $4,240.80/76.91%

=>$5,513.98

2.margin of safety = total sales - break even sales

margin of safety in units = 440 cakes -380 cakes =>60 cakes.

margin of safety in dollars = 60 cakes *$14.51=>$871......(rounded to nearest dollar).

3.to generate a profit of $2500

number of cakes to be sold = (fixed cost + required profit) / contribution per cake

=>(4240.80+2500)/11.16

=>604 cakes.........(to nearest whole number)