Question

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

Price per cake	$	17.00
Variable cost per cake
Ingredients		2.50
Direct labor		1.40
Overhead (box, etc.)		0.20
Fixed cost per month	$	3,850.00

Required:

1. Determine Cory’s break-even point in units and sales dollars.
2. Determine the bakery’s margin of safety if it currently sells 450 cakes per month.
3. Determine the number of cakes that Cory must sell to generate $2,000 in profit.

Answer 1

Answer :-

Cory’s break-even point in units and sales dollar are -

First we find out the Contribution Margin Per unit -

Contribution Margin per unit = Sale price per unit - Total Variable Cost per unit

Sale price per unit = $17.00

Total Variable cost per unit = Ingredients + Direct labor + Overhead

Total Variable Cost per unit = $2.50 + $1.40 + $0.20

Total Variable Cost per unit = $4.10

Contribution Margin per unit = $17.00 - $4.10 = $12.90

Break - even point in units = Fixed cost / Contribution margin per unit

Fixed Cost = $3,850.00

Break - even point in Units = $3,850.00 / $12.90

Break - even point in Units = 298.449 or 298 units

Break - even point in dollar = Break even point in Units × Sale price per unit

Break - even point in dollar = 298.449 units × $17.00

Break - even point in dollar = $5,073.63 or $5,074

The bakery’s margin of safety if it currently sells 450 cakes per month -

Margin of Safety = (Total sales unit × Sale price per unit ) - Break even point in dollar

Margin of safety = (450 units × $17 ) - $5,074

Margin of safety = $2,576

The number of cakes that Cory must sell to generate $2,000 in profit -

No.of Units sell = (Total Profit + Fixed Cost ) / Contribution Margin Per unit

No. Of Units Sell = ( $2,000 + $3,850)/ $12.90

No. Of Units sell = $453.488 or $453 units