Question

Cove’s Cakes is a local bakery. Price and cost information follows: Price per cake $ 13.31 Variable cost per cake Ingredients 2.16 Direct labor 1.04 Overhead (box, etc.) 0.14 Fixed cost per month $ 4,486.50 Required: 1. Calculate Cove’s new break-even point under each of the following independent scenarios: a. Sales price increases by $1.90 per cake. b. Fixed costs increase by $540 per month. c. Variable costs decrease by $0.29 per cake. d. Sales price decreases by $0.40 per cake. 2. Assume that Cove sold 465 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 9 percent increase in sales revenue.

Answer 1

Answer:

Instructions are listed below.

Explanation:

Giving the following information:

Price and cost information follows:

Price per cake $ 13.31

Variable cost per cake :

Ingredients 2.16

Direct labor 1.04

Overhead (box, etc.) 0.14

Total= 3.34

Fixed cost per month $ 4,486.50

Break-even point= fixed costs/ contribution margin

Break-even point= 4,486.5/(13.31 - 3.34)= 450 units

A) Selling price= 15.21

Break-even point= 4,486.5/(15.21 - 3.34)= 378 units

B) Fixed costs= 5,026.5

Break-even point= 5,026.5/ 9.97= 504 units

C) Variable cost= 3.05

Break-even point= 4,486.5/ (13.31 - 3.05)= 437 units

D) Selling price= 12.91

Break-even point= 4,486.5/(12.91 - 3.34)= 469 units

2) Degree of operational leverage= contribution margin / operating income

Operating income= 9.97*465 - 4,486.5= 149.55

Degree of operational leverage= 9.97/149.55= 0.067= 6.7%

3) New sales= 507 units

Effect on income= 418.74