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Answer :
Cove's Cakes has to sell 317 cakes to break even.
Cove's Cakes is a local bakery. Price and cost information are given below:
Price per cake = $13.71
Variable cost per cake = $2.33 (Ingredients + Direct labor + Overhead (box, etc.))
Fixed cost per month = $3,600
Variable costs are those costs that vary with the output level. This implies that when the production level increases, variable costs will also increase, while when the production level decreases, variable costs will also decrease. Cove's Cakes' variable cost per cake is $2.33.The fixed cost is constant, regardless of production or sales.
In other words, even if production and sales are zero, the fixed costs will still be incurred. Cove's Cakes' fixed cost per month is $3,600.Now, we have to find the contribution margin, which is the price per cake minus the variable cost per cake.
Contribution margin = Price per cake - Variable cost per cake= $13.71 - $2.33= $11.38The break-even point is the level of sales or production at which total revenue is equal to total costs (variable and fixed costs). In other words, it is the point where the contribution margin is enough to cover the fixed costs.
Break-even point = Fixed costs / Contribution margin= $3,600 / $11.38= 316.31 ≈ 317 cakesHence, Cove's Cakes has to sell 317 cakes to break even.
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