Question

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

Price per cake	$	14.31
Variable cost per cake
Ingredients		2.32
Direct labor		1.12
Overhead (box, etc.)		0.12
Fixed cost per month	$	3,547.50

Required:

1. Determine Cove’s break-even point in units and sales dollars.

2. Determine the bakery’s margin of safety if it currently sells 400 cakes per month.

3. Determine the number of cakes that Cove must sell to generate $1,500 in profit.

Answer 1

Requirement 1:

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

= $3,547.50 ÷ $10.75

= 330 units

Requirement 2:

Margin of safety = [(Current sales level - Break-even sales) ÷ Current sales level] x 100

= [(400-330) ÷ 400] x 100

= [70 ÷ 400] x 100

= 0.175 x 100

= 17.50%

Requirement 3:

Number of cakes that Cove must sell to generate $1,500 in profit

= [Fixed cost + Desired profit] ÷ Contribution margin per unit*

= [3,547.50 + 1,500] ÷ $10.75

= $5,047.5 ÷ $10.75

= 470 units

Thus, Number of cakes that Cove must sell to generate $1,500 in profit is 470 cakes

*Calculations:

Selling price		$14.31
Variable cost per unit:
Ingredients	$2.32
Direct labor	$1.12
Overhead	$0.12	$3.56
Contribution margin per unit		$10.75