Question

Cove’s Cakes is a local bakery. Price and cost information follows: Price per cake $ 14.71 Variable cost per cake Ingredients 2.22 Direct labor 1.10 Overhead (box, etc.) 0.21 Fixed cost per month $ 4,024.80

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 $1.80 per cake.

	Break-Even Point cakes

b. Fixed costs increase by $480 per month.

	Break-Even Point cakes

c. Variable costs decrease by $0.43 per cake.

	Break-Even Point cakes

d. Sales price decreases by $0.40 per cake.

	Break-Even Point cakes

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 4 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 11 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

	price per cake				14.71
	Variable cost per cake
	ingredients			2.22
	Direct labor			1.1
	overhead			0.21	3.53
	Contribution margin per cake				11.18
	Break even point(units) = fixed cost/contribution margin per unit
1a)	when sale increases by $1.80 per cake
	contribution will also increase by the same amount
		4024.80/(11.18+1.8)
	BEP	310	Cakes	answer
b)	fixed cost increase by 480per month
	(4024.8+480)/11.18
	403
	BEP	403	Cakes	answer
c)	Variable cost decrease by 0.43 per caje
	leading to increase in contribution
	(4024.8)/(11.18+.43)
	347
	BEP	347	Cakes	answer
d)	when sale decreases by $.40 per cake
	contribution will also decrease by the same amount
		4024.8/(11.18-.40)
	BEP	373	Cakes	answer
2)	contibution (380*11.18)=			4248.4
	less fixed cost			-4024.8
	net income			223.6
	degree of operating leverage = contribution/net income
				4248.4/223.6
				19.0000
3)	Effect on profit =		increase of sales revenue *degree of operating leverage
			11%*19
			209	%
	Effect on profit		209%