Answer:
Break-even point
a. Sales price increases by $1.60 per cake. 395 units
b. Fixed costs increase by $505 per month. 512 units
c. Variable costs decrease by $0.29 per cake. 447 units
d. Sales price decreases by $0.70 per cake. 495 units
2. Assume that Cove sold 460 cakes last month. Calculate the company’s degree of operating leverage.
Operating Leverage = 0
3. Using the degree of operating leverage, calculate the change in profit caused by a 7 percent increase in sales revenue.
Profit = $113.34
Step-by-step explanation:
Total Variable cost = $2.28 + $1.02 + $0.22 = $3.52
Contribution = $13.31 - $3.52 = $9.79
Break-even Point = Fixed cost / contribution per unit = $4,503.40 / $9.79 =
Break-even Point = 460 units
a. Sales price increases by $1.60 per cake.
Selling Price = $13.31 + $1.60 = $14.91
Contribution = $14.91 - $3.52 = $11.39
Break-even Point = Fixed cost / contribution per unit = $4,503.40 / $11.39 =
Break-even Point = 395.38 units = 395 units
b. Fixed costs increase by $505 per month.
Fixed Cost = $4,503.40 + $505 = $5,008.4
Contribution = $13.31 - $3.52 = $9.79
Break-even Point = Fixed cost / contribution per unit = $5,008.40 / $9.79 =
Break-even Point = 511.58 units = 512 units
c. Variable costs decrease by $0.29 per cake.
Variable cost = $3.52 - $0.29 = $3.23
Contribution = $13.31 - $3.23 = $10.08
Break-even Point = Fixed cost / contribution per unit = $4,503.40 / $10.08 =
Break-even Point = 446.77 units = 447 units
d. Sales price decreases by $0.70 per cake.
Selling Price = $13.31 - 0.70 = $12.61
Contribution = $12.61 - $3.52 = $9.09
Break-even Point = Fixed cost / contribution per unit = $4,503.40 / $9.09 =
Break-even Point = 495.42 units = 495 units
2. Assume that Cove sold 460 cakes last month. Calculate the company’s degree of operating leverage.
Total sales = 460 x 13.31 = $6,122.6
Total Variable Cost = 460 x 3.52 = $1,619.2
Total Contribution = $6,122.6 - $1,619.2 = 4503.40
Net income = $4503.40 - $4503.40 = 0
Operating Leverage = 4503.40 / 0 = 0
3. Using the degree of operating leverage, calculate the change in profit caused by a 7 percent increase in sales revenue.
Sales = 460 x 107% = 492.2 units
Profit = 0+ ((492.2 - 460) x 3.52) = $113.34