Question

Cove's Cakes is a local bakery. Price and cost information follows: 1.40 Price per cake $ 17.00 Variable cost per cake Ingredients 2.50 Direct labor Overhead (box, etc.) 0.20 Fixed cost per month $3,850.00 Required: 1. Calculate Cove's new break-even point under each of the following independent scenarios: a. Sales price increases by $1.00 per cake. b. Foxed costs increase by $500 per month c. Variable costs decrease by $0.35 per cake. d. Sales price decreases by $0.50 per cake. 2. Assume that Cove sold 400 cakes last month. Calculate the company's degree of operating leverage 3. Using the degree of operating leverage, calculate the change in profit caused by a 10 percent increase in sales revenue. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Calculate Cove's new break-even point under each of the following independent scenarios: (Round your answers to the nearest whole number.) a. Sales price increases by $1.00 per cake. Show more Break-Even Point 1a. Sales price increases by $1.00 per cake 1b. Foxed costs increase by $500 per month 10. Variable costs decrease by $0.35 per cake 1d. Sales price decreases by 50.50 per cake Required 2 >

Answer 1

	price per cake				17
	Variable cost per cake
	ingredients			2.5
	Direct labor			1.4
	overhead			0.2	4.1
	Contribution margin per cake				12.9
	contribution margin ratio=			12.9/17=		0.758824
	Break even point(units) = fixed cost/contribution margin per unit
	BEP (dollars) =		fixed cost/contribution margin ratio
1a)	when sale increases by $1.00 per cake
	contribution will also increase by the same amount
		3850/(12.9+1)
	BEP	277	Cakes	answer
b)	fixed cost increase by 500 per month
	(3850+500)/12.9
	337
	BEP	337	Cakes	answer
c)	Variable cost decrease by 0.35 per caje
	leading to increase in contribution
	(3850)/(12.9+.35)
	291
	BEP	291	Cakes	answer
d)	when sale decreases by $.50 per cake
	contribution will also decrease by the same amount
		3850/(12.9-.5)
	BEP	310	Cakes	answer
2)	contibution (400*12.9)=			51600
	less fixed cost			-3850
	net income			47750
	degree of operating leverage = contribution/net income
				51600/47750
				1.0806
3)	Effect on profit =		increase of sales revenue *degree of operating leverage
			10%*1.0806
			10.806	%
	Effect on profit		10.81%