Problem
The Cottage Bakery sells a variety of gourmet breads, cakes, pies, and pastries. Although its wares are considerably more expensive than those available at supermarkets and other bakeries, the Cottage Bakery has a loyal clientele willing to pay a premium price for premium quality. In a typical month, the Cottage Bakery generates revenue of $150,000 and earns a profit of $7,500. The Cottage Bakery's contribution margin ratio is 40%.
What is the Cottage Bakery's margin of safety at its current sales level?
What is the Cottage Bakery's current degree of operating leverage?
Now assume that Cottage Bakery expects a 15% increase in revenues. Using the information above, how much should Cottage Bakery expect their profits to increase?