Cove’s Cakes is a local bakery. Price and cost information follows: Price per cake $ 14.01...

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


Price per cake	$	14.01
Variable cost per cake
Ingredients		2.19
Direct labor		1.12
Overhead (box, etc.)		0.29
Fixed cost per month	$	3,955.80

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 $1.10 per cake.

b. Fixed costs increase by $450 per month.

c. Variable costs decrease by $0.44 per cake.

d. Sales price decreases by $0.50 per cake.

2. Assume that Cove sold 400 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 5 percent increase in sales revenue. (Round your final answer to 2 decimal places (i.e. .1234 should be entered as 12.34%.))

Solutions

Expert Solution

1a) Calculation of Break Even Point
Sale Price Per unit	15.11
Variable Cost per unit	3.60
Contribution per unit	11.51
Contribution Ratio	76.17%
Fixed Cost	3955.8
Break even point in dollar sales	5193
(Fixed Cost / Contribution Ratio)
1b) Calculation of Break Even Point
Sale Price Per unit	14.01
Variable Cost per unit	3.60
Contribution per unit	10.41
Contribution Ratio	74.30%
Fixed Cost	4405.8
Break even point in dollar sales	5929
(Fixed Cost / Contribution Ratio)
1c) Calculation of Break Even Point
Sale Price Per unit	14.01
Variable Cost per unit	3.16
Contribution per unit	10.85
Contribution Ratio	77.44%
Fixed Cost	3955.8
Break even point in dollar sales	5108
(Fixed Cost / Contribution Ratio)
1d) Calculation of Break Even Point
Sale Price Per unit	13.51
Variable Cost per unit	3.60
Contribution per unit	9.91
Contribution Ratio	73.35%
Fixed Cost	3955.8
Break even point in dollar sales	5393

2. Degree of operating leverage =
Contribution / Net Operating Income
Contribution	4164
Net Operating Income	208
Thus, operating Leverage	20
Sales for 400 Units	5604
Variable Costs	1440
Contribution	4164
Fixed Cost	3955.8
Net Operating Income	208


3. Net Operating income will increase by = 20*5% = 100%

ekkarill92 answered 10 months ago

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