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Answer :
Final answer:
In this business context, Cove's Cakes' break-even point occurs when total revenues meet total costs, yielding a profit of $0. Its target profit relies on the firm's predetermined profit goal, necessitating sales beyond its break-even point. The margin of safety represents the difference between actual and break-even sales, stating how much sales can fall before losses are incurred.
Explanation:
The break-even point for Cove's Cakes, or any other firm, is established when total costs equal total revenues, thus implying zero profits. Let's say, for instance, Cove's Cakes sells a quantity of 75 units (cakes or packs) at a unit price of $2.75. Therefore, total revenues would be 75 (unit quantity) times $2.75 (unit price), or $206.25. If the average cost per unit is also $2.75, total costs would also amount to $206.25 (75 units times $2.75/unit). Subtracting total costs from total revenues yields a profit of $0, thus indicating that Cove's Cakes has reached its break-even point.
As for the target profit, this will depend on the firm's profit objective. As such, Cove's Cakes would need to sell units over its break-even quantity to achieve this objective. The margin of safety, on the other hand, is the difference between actual sales and break-even sales. It indicates how much sales can fall before the firm starts incurring losses.
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