Question

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

Price per cake	$	14.11
Variable cost per cake
Ingredients		2.35
Direct labor		1.05
Overhead (box, etc.)		0.18
Fixed cost per month	$	4,212.00

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 $1.50 per cake.



b. Fixed costs increase by $460 per month.



c. Variable costs decrease by $0.43 per cake.



d. Sales price decreases by $0.60 per cake.



2. Assume that Cove sold 415 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

Ans:

Particulars	Amount ($)	Amount ($)
Selling Price per cake		$14.11
Less: Variable Costs per cake
Ingredients	$2.35
Direct Labor	$1.05
Overhead	$0.18	($3.58)
Contribution Margin per cake		$10.53
Contribution Margin Ratio ($10.53 / $14.11)		74.63%

Formula for Break even Point = Fixed Costs / contribution Margin

1a. Selling price = ($14.11 + $1.50) - $3.58 = $12.03 contribution margin

Break even point = $4212 / $12.03 = 350 cakes per month

1b. Fixed Cost = $4212 + $460 = $4672

Break even point = $4672 / $10.53 = 444 cakes per month

1c. Variable costs = $3.58 - $0.43 = $3.15

Contribution margin = $14.11 - $3.15 = $10.96

Break even point = $4212 / $10.96 = 384 cakes per month

1d. Selling price = ($14.11 - $0.60) - $3.58 = $9.93 contribution margin

Break even point = $4212 / $9.93 = 424 cakes per month

2. Degree of Operating Leverage (Sold 415 cakes per month) = Sales - Variable cost / Sales - Variable cost - Fixed costs

= (415 * $14.11) - (415 * $3.58) / [(415 * $14.11) - (415 * $3.58) - $4212]

= $5855.65 - $1485.70 / $5855.65 - $1485.70 - $4212

= $4369.95 / $157.95

Degree of Operating Leverage = 27.67%

3. Operating levergae = % Change in operating Income / % Change in sales

27.67% = % Change in operating Income / 12%

% Change in operating Income = 0.2767 * 0.12 * 100

% Change in operating Income = 3.32%