Question

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

Price per cake $ 13.51
Variable cost per cake
Ingredients 2.26
Direct labor 1.09
Overhead (box, etc.) 0.27
Fixed costs per month 3,560.40
Required:
Determine Cove’s break-even point in units and sales dollars.
Determine the bakery’s margin of safety in sales dollars if it currently sells 420 cakes per month.
Determine the number of cakes that Cove must sell to generate $2,700 in profit.

Answer 1

Cove’s break-even point is approximately 360 cakes per month.

the bakery’s margin of safety is $807.60 in sales dollars.

Cove must sell approximately 575 cakes to generate $2,700 in profit.

Step-by-step explanation:

To determine Cove’s break-even point in units, we need to calculate the contribution margin per cake:

Contribution margin per cake = Price per cake – Variable cost per cake

Contribution margin per cake = $13.51 – ($2.26 + $1.09 + $0.27)

Contribution margin per cake = $9.89

To determine the break-even point in units, we divide the total fixed costs by the contribution margin per cake:

Break-even point in units = Fixed costs ÷ Contribution margin per cake

Break-even point in units = $3,560.40 ÷ $9.89

Break-even point in units = 359.3

So Cove’s break-even point is approximately 360 cakes per month.

To determine Cove’s break-even point in sales dollars, we can multiply the break-even point in units by the price per cake:

Break-even point in sales dollars = Break-even point in units × Price per cake

Break-even point in sales dollars = 360 × $13.51

Break-even point in sales dollars = $4,863.60

Therefore, Cove’s break-even point is 360 cakes per month or $4,863.60 in sales dollars.

To determine the bakery’s margin of safety in sales dollars, we need to subtract the break-even point in sales dollars from the actual sales:

Margin of safety = Actual sales – Break-even point in sales

Margin of safety = (420 cakes × $13.51 per cake) – $4,863.60

Margin of safety = $5,671.20 – $4,863.60

Margin of safety = $807.60

Therefore, the bakery’s margin of safety is $807.60 in sales dollars.

To determine the number of cakes that Cove must sell to generate $2,700 in profit, we can use the following formula:

Profit = (Price per cake × Quantity sold) – (Variable cost per cake × Quantity sold) – Fixed costs

We can rearrange the formula to solve for the quantity sold:

Quantity sold = (Profit + Fixed costs) ÷ (Price per cake – Variable cost per cake)

Quantity sold = ($2,700 + $3,560.40) ÷ ($13.51 – $2.62)

Quantity sold = $6,260.40 ÷ $10.89

Quantity sold = 575.2

Therefore, Cove must sell approximately 575 cakes to generate $2,700 in profit.