Question

E6-4 Analyzing Changes in Price, Cost Structure, Degree of Operating Leverage [LO 6-4, 6-5] Cove's Cakes is a local bakery. Price and cost information follows: Price per cake Variable cost per cake Ingredients Direct labor Overhead (box, etc.) Fixed cost per month $ 14.11 2.30 1.14 0.22 $4,493.50 Required: 1. Calculate Cove's new break-even point under each of the following independent scenarios: (Round your answer to the nearest whole number.) a. Sales price increases by $1.20 per cake. Break-Even Point cakes b. Fixed costs increase by $550 per month. Break-Even Point cakes

Answer 1

Solution of the above problem is as under:

Break-Even Point is the stage at which revenues equal costs.

Formula: Break Even Point (Units)= Fixed Costs/(Revenue per unit- Variable Cost per unit)

1)a) Calculation of Break Even Point when the sale price increases by $ 1.20 per cake.

Break Even Point= 4493.50 / (15.31-3.66) = 386 Cakes

New Sale Price per Cake: $ (14.11+1.20)= $ 15.31

Variable Cost per Cake: $ (2.30+1.14+0.22)= $ 3.66

b) Calculation of Break Even Point when Fixed Cost increases by $ 550 per Month.

New Fixed Cost: $ (4493.50+550)= $ 5043.50

Break Even Point: 5043.50 / (14.11-3.66) = 483 Cakes

c) Calculation of Break Even Point when Variable Cost decreases by $ 0.37 per Cake:

New Variable Cost per Unit: $ (3.66-0.37) = $ 3.29

Break Even Point: 4493.50 / (14.11-3.29) = 415 Cakes

d) Calculation of Break Even Point when the sale price decreases by $ 0.30 per cake:

New Sale Price per Cake = $ (14.11-0.30) = $ 13.81

Break Even Point : 4493.50 / (13.81-3.66) = 443 Cakes

2) Calculation of Degree of Operating Leverage

Particulars	Amount ($)
Sales ($14.11* 455)	6420.05
Variable Cost (VC) {$3.66*455}	1665.3
Fixed Cost (FC)	4493.5
Sales-VC………….(A)	4754.75
Sales-VC-FC……..(B)	261.25
Degree of Operating Leverage (A)/(B)	18.2

3) Degree of Operating Leverage = Percentage Change in EBIT (i.e Profit) divided by Percentage Change in Sales

That is, 18.2 = Percentage in Profit / 14

Therefore, Percentage change in Profit= 14*18.2= 254.8