Question

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

Price per cake	$	13.81
Variable cost per cake
Ingredients		2.33
Direct labor		1.19
Overhead (box, etc.)		0.17
Fixed cost per month	$	3,137.20

Required:
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.)

   

2. Determine the bakery’s margin of safety if it currently sells 370 cakes per month. (Round your intermediate calculations to 2 decimals. Round the break-even units and final answer to nearest whole dollar.)

   

3. Determine the number of cakes that Cove must sell to generate $1,300 in profit. (Round your intermediate calculations to 2 decimal places and final answer to nearest whole number.)

Answer 1

Contribution Margin per unit = Sales price - Variable costs

= 13.81 - (2.33+1.19+0.17) = 10.12

Contribution margin ratio = Contribution margin/Sales price = 10.12/13.81 = 73.28%

Breakeven point in units = Fixed cost/Contribution margin per unit = 3137.20/10.12 = 310 units Breakeven point in sales dollars = Fixed cost/Contribution margin ratio = 3137.20/73.28% = 4281.11 (Or try 4281.10) ​​​​​​

Margin of Safety = Sales - Breakeven sales units = 370 - 310 = 60 units

Units to be sold = (Fixed costs + Target profit)/Contribution margin per unit = (3137.20+1300)/10.12 = 438 units (or try 439 units)