Question

E6-3 Determining Break-Even Point, Target Profit, Margin of Safety [LO 6-1, 6-2, 6-3]

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

Price per cake	$	13.31
Variable cost per cake
Ingredients		2.18
Direct labor		1.01
Overhead (box, etc.)		0.22
Fixed cost per month	$	3,465.00

1. Determine Cove’s break-even point in units and sales dollars. (Round your Break-Even Units answer to the nearest whole number. Round your other intermediate calculations and sales dollars answer to 2 decimal places.)

	Break-Even Units Cakes Break-Even Sales Dollars

2. Determine the bakery’s margin of safety if it currently sells 400 cakes per month. (Round your intermediate calculations to 2 decimals. Round the break-even units and final answer to nearest whole dollar.)

	Margin of Safety

3. Determine the number of cakes that Cove must sell to generate $1,600 in profit. (Round your intermediate calculations to 2 decimal places and final answer to nearest whole number.)

	Target Sales Units Cakes

Answer 1

Contribution margin per unit:
Selling price per unit			13.31
Less: Variable cost per unit
Ingredients			2.18
Direct Labor			1.01
Overheads			0.22
Total Variable cost per unit			9.90
Contribution margin ratio:
Contribution margin per unit			9.90
Less: Selling price per unit			13.31
Contribution margin ratio:			74.00%
Break-even units:
Total Fixed cost			3,465
Divide: Contribution margin per unit			9.90
Break-even units:			350
Break-even sales in $:
Total Fixed cost			3,465
Divide: Contribution margin ratio			74%
Break even sales in $			4,682
Margin of Safety
Total sales units			400
Less: Break even units			350
Margin of Safety units			50
Required sales units:
Total fixed cost			3,465
Target Income			1,600
Target contribution margin			5,065
Divide: Contribution margin per unit			9.90
Required sales units			512