Question

Price Per cake	14.51$
Variable Cost per cake
ingredients	2.31$
direct labor	1.13$
overhead(box,etc)	0.15$
fixed cost per month	5,132.40$

1.

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

ANSWER

1.

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

a.

Variable cost per cake = $2.31 + $ 1.13 + $0.15 = $3.59

Contribution margin per cake = ($14.51+ $1.90) - $3.59 = $12.82

Break even point = $5,132.40/$12.82= 400.34= 401 cakes

b.

Contribution margin per unit = $14.51- $3.59 = $10.92

Break-even point = ($5,132.40+$530 ) / $10.92= 518.53= 519 cakes

c.

Contribution margin per unit = $14.51- $3.59 + $0.33 = $11.25

Break-even point = $5,132.40/$11.25= 456.21= 457 cakes

d.

Contribution margin per cake = ($14.51- $0.60 ) - $3.59 = $10.32

Break even point = $5,132.40/$10.32= 497.32= 498 cakes

2.

Total Contribution margin = 495 cakes * $10.92= $5,405.40

Fixed costs = $5,132.40

Net operating income = $5,405.40 - $5,132.40= $273

Degree of operating leverage = $5,405.40 / $273= 19.8

3.

Effect on profit =increase of sales revenue *degree of operating leverage

=14%*19.8

=277.2%

Effect on profit =277.2%

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