Question

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

Price per cake	$	14.01
Variable cost per cake
Ingredients		2.33
Direct labor		1.19
Overhead (box, etc.)		0.11
Fixed cost per month	$	3,010.20

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.

Break Even Point _______ Cakes



b. Fixed costs increase by $485 per month.

Break Even Point _______ Cakes


c. Variable costs decrease by $0.39 per cake.

Break Even Point _______ Cakes



d. Sales price decreases by $0.70 per cake.

Break Even Point _______ Cakes



2. Assume that Cove sold 315 cakes last month. Calculate the company’s degree of operating leverage. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Degree of Operating Leverage: ________



3. Using the degree of operating leverage calculated in Requirement 2, calculate the change in profit caused by a 8 percent increase in sales revenue. (Round your final answer to 2 decimal places (i.e. .1234 should be entered as 12.34%.))

Effect on Profit _______ %

Answer 1

Answer to Part 1-a.

Break Even Point (in units) = Fixed Cost / Contribution Margin per unit
Contribution Margin per unit = Selling Price per unit – Variable Cost per unit
Variable Cost per unit = $2.33 + $1.19 + $0.11
Variable Cost per unit = $3.63

Expected Selling Price per unit = $14.01 + $1.50 = $15.51
Contribution Margin per unit = $15.51 - $3.63
Contribution Margin per unit = $11.88

Break Even Point (in units) = 3,010.20 / 11.88
Break Even Point (in units) = 253.38 or 253 cakes

Answer to Part 1-b.

Break Even Point (in units) = Fixed Cost / Contribution Margin per unit
Expected Fixed Cost = $3,010.20 + $485
Expected Fixed Cost = $3,495.20

Contribution Margin per unit = $14.01 - $3.63
Contribution Margin per unit = $10.38

Break Even Point (in units) = 3,495.20 / 10.38
Break Even Point (in units) = 336.72 or 337 cakes

Answer to Part 1-c.

Break Even Point (in units) = Fixed Cost / Contribution Margin per unit
Expected Variable Cost = $3.63 - $0.39 = $3.24
Contribution Margin per unit = $14.01 - $3.24 = $10.77

Break Even Point (in units) = 3,010.20 / 10.77
Break Even Point (in units) = 279.50 or 280 cakes

Answer to Part 1-d.

Break Even Point (in units) = Fixed Cost / Contribution Margin per unit
Expected Selling Price per unit = $14.01 - $0.70 = $13.31
Expected Contribution Margin per unit = $13.31 - $3.63
Expected Contribution Margin per unit = $9.68

Break Even Point (in units) = 3,010.20 / 9.68
Break Even Point (in units) = 310.97 or 311 cakes

Answer to Part 2.

Degree of Operating Leverage = Contribution Margin / Operating Income

Variable Cost per unit = $2.33 + $1.19 + $0.11
Variable Cost per unit = $3.63

Contribution Margin = Sales – Variable Cost
Contribution Margin = ($14.01 * 315) – ($3.63 * 315)
Contribution Margin = $4,413.15 - $1,143.45
Contribution Margin = $3,269.70

Operating Income = Contribution Margin – Fixed Cost
Operating Income = $3,269.70 - $3,010.20
Operating Income = $259.50

Degree of Operating Leverage = 3,269.70 / 259.50
Degree of Operating Leverage = 12.60 times

Answer to Part 3.

Degree of Operating Leverage = % Change in Operating Income/ % Change in Sales
12.60 = % Change in Operating Income / 8
% Change in Operating Income = 100.80%