Coves Cakes is a local bakery with a price per cake of $13.31. The ingredients cost $2.29, direct labor is $1.04, and overhead is $0.16 per cake. The fixed costs per month are $3,535.20.

Using the degree of operating leverage (DOL), calculate the change in profit for Coves Cakes.

What is the degree of operating leverage (DOL) for Coves Cakes?

A. 1.37
B. 1.54
C. 2.67
D. 3.25

Question

07-01-2025
Business

High School

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Coves Cakes is a local bakery with a price per cake of $13.31. The ingredients cost $2.29, direct labor is $1.04, and overhead is $0.16 per cake. The fixed costs per month are $3,535.20.

Using the degree of operating leverage (DOL), calculate the change in profit for Coves Cakes.

What is the degree of operating leverage (DOL) for Coves Cakes?

A. 1.37
B. 1.54
C. 2.67
D. 3.25

Answer :

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Final answer:

The degree of operating leverage (DOL) for Coves Cakes is a) 1.37.

Explanation:

The degree of operating leverage (DOL) is calculated by dividing the contribution margin by the operating income. In this case, the contribution margin is the selling price per cake minus variable costs per cake, which equals $13.31 - $2.29 - $1.04 - $0.16 = $9.82. The operating income is the total revenue minus the total costs, including fixed costs. Therefore, the DOL can be computed as ($13.31 * x - $2.29x - $1.04x - $0.16x) / ($13.31x - $2.29x - $1.04x - $0.16x - $3,535.20) = $9.82x / ($9.82x - $3,535.20). To find the value of x where x is the number of cakes sold, we can substitute the given values into the equation and solve for x. After calculating, we find that DOL ≈ 1.37.

Therefore, the correct option for the given question is a) 1.37, which represents the degree of operating leverage (DOL) for Coves Cakes. This metric indicates the sensitivity of the company's operating income to changes in sales volume and helps assess the risk associated with fixed costs and the potential impact on profitability.