Question: Refer to the information for Coves Cakes in E6-3. Price per cake ....... $17.00 Variable cost per cake Ingredients ........ 2.50 Direct labor ....... 1.40

Refer to the information for Cove’s Cakes in E6-3.

Price per cake ....... $17.00

Variable cost per cake

Ingredients ........ 2.50

Direct labor ....... 1.40

Overhead (box, etc.) ..... 0.20

Fixed cost per month ....$3,850.00

Required:

1. Calculate Cove’s new break-even point under each of the following independent scenarios:

a. Sales price increases by $1.00 per cake.

b. Fixed costs increase by $500 per month.

c. Variable costs decrease by $0.35 per cake.

d. Sales price decreases by $0.50 per cake.

2. Refer to the original information presented in E6-3. Assume that Cove sold 400 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 10 percent increase in sales revenue.

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