High School

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Dove's Cakes is a local bakery. Price and cost information is as follows:

- Price per cake: $15.01
- Variable cost per cake:
- Ingredients: $2.22
- Direct labor: $1.15
- Overhead (box, etc.): $0.15
- Fixed cost per month: $5,285.40

**Required:**

1. Determine Dove's break-even point in units and sales dollars.
2. Determine the bakery’s margin of safety if it currently sells 540 cakes per month.
3. Determine the number of cakes that Dove must sell to generate $1,100 in profit.

Please show all your work. Thank you.

Answer :

  1. The break-even point for Dove's Cakes is approximately 459 units or $6,891.59 in sales dollars.
  2. The bakery currently has a margin of safety of 81 cakes, indicating its sales volume is 81 cakes above the break-even point.
  3. To achieve a profit of $1,100, Dove's Cakes needs to sell approximately 555 cakes.

1. Break-even point in units:

Fixed costs = $5,285.40

Contribution margin per unit = Price per cake - Variable cost per cake

= $15.01 - ($2.22 + $1.15 + $0.15)

= $11.49

Break-even point in units = Fixed costs / Contribution margin per unit

= $5,285.40 / $11.49

≈ 459 units

Break-even point in sales dollars:

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

459 units * $15.01 = $6,891.59

2. Margin of safety:

Margin of safety = Actual sales - Break-even sales

= 540 cakes - 459 cakes

= 81 cakes

3. Number of cakes for $1,100 profit:

Target profit = Fixed costs + Desired profit

= $5,285.40 + $1,100

= $6,385.40

Contribution margin per unit * Number of cakes = Target profit

$11.49 * Number of cakes = $6,385.40

Number of cakes ≈ 555 cakes

Learn more about break even point here:-

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