Question

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

Price per cake	$	14.61
Variable cost per cake
Ingredients		2.15
Direct labor		1.01
Overhead (box, etc.)		0.16
Fixed cost per month	$	3,274.10

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 $465 per month.

c. Variable costs decrease by $0.30 per cake.

d. Sales price decreases by $0.70 per cake.

2. Assume that Cove sold 310 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 9 percent increase in sales revenue.

Answer 1

• All working forms part of the answer
• Requirement 1

A	Price per cake	$                    16.21
B	Total variable cost per cake	$                       3.32
C = A - B	Contribution margin per cake	$                    12.89
D	Fixed Cost	$              3,274.10
E = D/C	Break Even point	254	Answer [a]
A	Price per cake	$                    14.61
B	Total variable cost per cake	$                       3.32
C = A - B	Contribution margin per cake	$                    11.29
D	Fixed Cost	$              3,739.10
E = D/C	Break Even point	331	Answer [b]
A	Price per cake	$                    14.61
B	Total variable cost per cake	$                       3.02
C = A - B	Contribution margin per cake	$                    11.59
D	Fixed Cost	$              3,274.10
E = D/C	Break Even point	282	Answer [c]
A	Price per cake	$                    13.91
B	Total variable cost per cake	$                       3.32
C = A - B	Contribution margin per cake	$                    10.59
D	Fixed Cost	$              3,274.10
E = D/C	Break Even point	309	Answer [d]

• Requirement 2

A	Price per cake	$                    14.61
B	Total variable cost per cake	$                       3.32
C = A - B	Contribution margin per cake	$                    11.29
D	Total cakes sold	310
E = C x D	Total Contribution margin	$              3,499.90
F	Fixed Cost	$              3,274.10
G = E - F	Net Income	$                  225.80
H = E/G	Degree of Operating Leverage	15.50	Answer

• Requirement 3

A	Change in Sales Revenue	9%
B	Degree of Operating Leverage	15.5
C = A x B	Effect on Profits	139.50%	Answer