E6-3 Determining Break-Even Point, Target Profit, Margin of Safety [LO 6-1, 6-2,

Question

E6-3 Determining Break-Even Point, Target Profit, Margin of Safety [LO 6-1, 6-2, 6-3]

Cove’s Cakes is a local bakery. Price and cost information follows:

1. Determine Cove’s break-even point in units and sales dollars. (Round your Break-Even Units answer to the nearest whole number. Round your other intermediate calculations and sales dollars answer to 2 decimal places.)

2. Determine the bakery’s margin of safety if it currently sells 400 cakes per month. (Round your intermediate calculations to 2 decimals. Round the break-even units and final answer to nearest whole dollar.)

3. Determine the number of cakes that Cove must sell to generate $1,600 in profit. (Round your intermediate calculations to 2 decimal places and final answer to nearest whole number.)

Price per cake $ 13.31 Variable cost per cake Ingredients 2.18 Direct labor 1.01 Overhead (box, etc.) 0.22 Fixed cost per month $ 3,465.00

Explanation / Answer

1. Break-even units = Fixed Costs / Contribution per unit
= $3,465 / ($13.31 - 2.18 - 1.01 - 0.22)
= $3,465 / $9.90 = 350 Cakes

Break-Even Sales Dollars = Break-even units X Selling price
= 350 x $13.31 = $4,658.50

2. Margin of Safety = Sales - BEP = 400 - 350= 50 Cakes

3. Target Sales Units = (Fixed costs + Target profit) / Contribution per unit
= ($3,465 + $1,600) / $9.90 = 512 Cakes

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