The Cottage Bakery sells a variety of gourmet breads, cakes, pies, and pastries. Although its wares are considerably more expensive than those available at supermarkets and other bakeries, the Cottage Bakery has a loyal clientele willing to pay a premium price for premium quality. In a typical month, the Cottage Bakery generates revenue of $150,000 and earns a profit of $7,500. The Cottage Bakery’s contribution margin ratio is 40%.

Required:

a. What is the Cottage Bakery’s margin of safety at its current sales level?

b. What is the Cottage Bakery’s operating leverage?

c. What is the revenue required for Cottage Bakery to break even on a cash basis?

Assume that 30% of the Cottage Bakery’s fixed costs represent noncash items (e.g., depreciation expense on the ovens, furniture, and fixtures). All other expenses are paid in cash and all revenues are received in cash.