Question

Cove’s Cakes is a local bakery. Price and cost information follows: Price per cake $ 14.31 Variable cost per cake Ingredients 2.18 Direct labor 1.03 Overhead (box, etc.) 0.27 Fixed cost per month $ 3,790.50

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 $1.80 per cake.

b. Fixed costs increase by $495 per month.

c. Variable costs decrease by $0.44 per cake.

d. Sales price decreases by $0.70 per cake.

2. Assume that Cove sold 370 cakes last month. Calculate the company’s degree of operating leverage. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

3. Using the degree of operating leverage calculated in Requirement 2, calculate the change in profit caused by a 6 percent increase in sales revenue. (Round your final answer to 2 decimal places (i.e. .1234 should be entered as 12.34%.))

Answer 1

Selling price per cake = $14.31

Variable cost per cake = 2.18 + 1.03 + 0.27 = $3.48

Contribution Per Unit (CPU) = 14.31 - 3.48 = $10.83

Fixed cost per month (FC) = $3,790.5

1)

Break Even Point (Units) = FC / CPU

a)

CPU = (14.31 + 1.8) - 3.48 = $12.63

BEP = 3,790.5 / 12.63 = 300 cakes

b)

FC = 3,790.5 + 495 = $4,285.5

CPU = 10.83

BEP = 4,285.5 / 10.83 = 396 cakes

c)

CPU = 14.31 - (3.48 - 0.44) = $11.27

BEP = 3,790.5 / 11.27 = 336 cakes

d)

CPU = (14.31 - 0.7) - 3.48 = $10.13

BEP = 3,790.5 / 10.13 = 374 cakes

2)

Degree of Operating Leverage (DOL) = Contribution / Net income

Contribution = 370 cakes * 10.83 per cake = $4,007.1

Net income = Contribution - FC = 4,007.1 - 3,790.5 = $216.6

DOL = 4,007.1 / 216.6 = 18.5

3)

DOL = Change in profit / Change in sales

18.5 = Change in profit / 6

Therefore, Change in profit = 18.5 * 6 = 111% (increase)