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 |

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Variable cost per cake
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