Question

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

Price per cake	$	13.81
Variable cost per cake
Ingredients		2.16
Direct labor		1.18
Overhead (box, etc.)		0.18
Fixed cost per month	$	3,189.90

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.)

Break Even Units: _____ Cakes

Break Even Sales Dollars:

   

2. Determine the bakery’s margin of safety if it currently sells 380 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 $2,900 in profit. (Round your intermediate calculations to 2 decimal places and final answer to nearest whole number.)

Target Sales Units:

Answer 1

Solution 1:

Contribution margin per unit = Price per cake - variable expenses = $13.81 - ($2.16+$1.18 + $0.18) = $10.29

Contribuion Margin Ratio = $10.29 / $13.81 = 74.51%

Break-even point in units = Fixed cost / Contribution margin per unit = $3,189.90 / 10.29 = 310 units

Break-even point in sales dollars = Fixed cost / CM ratio = $3189.90 / 74.51 = $4,281.17

Solution 2:

Margin of safety in units = Budgeted Sales units - Break even point in units = 380 - 310 = 70 Units

Margin of safety in dollars = 380*13.81 - $4281.17 = $966.63

Solution 3:

Target Profit = $2,900

Target Profit Including fixed cost = $2900+ $3189.90 = $6089.90

Number of cakes that cover target profit = Target profit including Fixed costs / Contribution margin per unit

= $6089.90 / 10.29 = 591.83 or say 592 cakes