E6-4 Analyzing Changes in Price, Cost Structure, Degree of Operating Leverage [L

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: $ 13.51 Price per cake Variable cost per cake 2.27 1.18 0.11 $3,383.00 Direct labor Overhead (box, etc.) Fixed cost per month 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. Point cakes b. Fixed costs increase by $455 per month. Point cakes c. Variable costs decrease by $0.37 per cake. cakes d. Sales price decreases by $0.30 per cake. cakes 2. Assume that Cove sold 365 cakes last month. Calculate the company's degree of operating leverage. (Do not round intermediate calculations. Round your answer to 2 decimal places.) 3. Using the dogree of operating everag@ calculate in Requirernent 2, calculate tho chang@ in profit caused by a 6 percent increase in sales revenue. Round your final answer to 2 decimal places i e .1234 should be entered as 12.34% on Profit

Explanation / Answer

Req 1-a Revises selling price: 14.71 Less: Variable cost 3.56 Contribution margin 11.15 Fixed cost 3383 Break even point: Fixed cost / CM per unit 3383 / 11.15 = 303 cakes Req b: Selling price: 13.51 Less: Variable cost 3.56 Contribution margin 9.95 Fixed cost 3838 Break even point: Fixed cost / CM per unit 3838 /9.95 = 386 units Req c: Selling price: 13.51 Less: Variable cost 3.19 Contribution margin 10.32 Fixed cost 3383 Break even point: Fixed cost / CM per unit 3383 / 10.32 = 328 units Req d: Selling price: 13.21 Less: Variable cost 3.56 Contribution margin 9.65 Fixed cost 3383 Break even point: Fixed cost / CM per unit 3383 /9.65 = 351 units Req 2: Selling price 13.51 Less: variable cost per unit 3.56 CM per unit 9.95 Number of units 365 Contribution margin 3631.75 Less: Fixed cost 3383 Net income 248.75 Degree of Operating leverage = Contribution/ Net Income 3631.75/ 248.75 = 14.60 Req 2-b: Sales increase by 6% Degree of Operating leverage: 14.60 Net Income increases by (6*14.60): 87.60%

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