Question

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

Price per cake	$	14.71
Variable cost per cake
Ingredients		2.31
Direct labor		1.01
Overhead (box, etc.)		0.13
Fixed cost per month	$	4,278.80

Required:

1. Calculate Cove’s new break-even point under each of the following independent scenarios:

a. Sales price increases by $1.60 per cake.

b. Fixed costs increase by $545 per month.

c. Variable costs decrease by $0.42 per cake.

d. Sales price decreases by $0.60 per cake.

2. Assume that Cove sold 395 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 5 percent increase in sales revenue.

Answer 1

1a) Calculation of Break Even Point
Sale Price Per unit	16.31
Variable Cost per unit	3.45
Contribution per unit	12.86
Contribution Ratio	78.85%
Fixed Cost	4278.8
Break even point in dollar sales	5427
(Fixed Cost / Contribution Ratio)
1b) Calculation of Break Even Point
Sale Price Per unit	14.71
Variable Cost per unit	3.45
Contribution per unit	11.26
Contribution Ratio	76.55%
Fixed Cost	4823.8
Break even point in dollar sales	6302
(Fixed Cost / Contribution Ratio)
1c) Calculation of Break Even Point
Sale Price Per unit	14.71
Variable Cost per unit	3.03
Contribution per unit	11.68
Contribution Ratio	79.40%
Fixed Cost	4278.8
Break even point in dollar sales	5389
(Fixed Cost / Contribution Ratio)
1d) Calculation of Break Even Point
Sale Price Per unit	14.11
Variable Cost per unit	3.45
Contribution per unit	10.66
Contribution Ratio	75.55%
Fixed Cost	4278.8
Break even point in dollar sales	5664

2.

2. Degree of operating leverage =
Contribution / Net Operating Income
Contribution = 4448
Net Operating Income = 169
Thus, operating Leverage = 26.333
Sales for 395 Units	5810.45
Variable Costs	1363
Contribution	4448
Fixed Cost	4279
Net Operating Income	169

3. 3. Net Operating income will increase by = 26.333*5% = 131.667%