13. Healthy Foods, Inc. sells 50-pound bags of grapes to the military for $10 a bag.
The fixed costs of this operation are $80,000, while the variable costs of the
Grapes are $.10 per pound.
a. What is the break-even point in bags?
8,000 bags
b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.
12,000 x $10 = 120,000
80,000 + .10 x 50lbs x 12,000 = 80,000 + 60,000 = 140,000
120,000 – 140,000 = -20,000 loss
25,000 x $10 = 250,000
80,000 + .10 x 50lb x 25000 = 80,000 + 125000 = 205,000
250,000 – 205,000 = 45,000 profit
c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags?
20,000 bags DOL = 4.6 25,000 bags DOL = 5.0
Why does the degree of operating leverage change as the quantity sold
Increases?
To measure the business risk the DOL measures the EBIT’s percentage change to the level of output by one percent.
d. If Healthy Foods has an annual interest expense of $10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags.
20,000 bags x $10 = 200,000 - $10,000 = 190,000 – 80,000 = 110,000
25,000 bags x $10 = 250,000 - $10,000 = 240,000 – 80,000 = 160,000
e. What is the degree of combined leverage at both sales levels?
I am not sure how to do E. can you please help me.. thank you
b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.
12,000 x $10 = 120,000
80,000 + .10 x 50lbs x 12,000 = 80,000 + 60,000 = 140,000
120,000 – 140,000 = -20,000 loss
25,000 x $10 = 250,000
80,000 + .10 x 50lb x 25000 = 80,000 + 125000 = 205,000
250,000 – 205,000 = 45,000 profit
c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags?
20,000 bags DOL = 4.6 25,000 bags DOL = 5.0
Why does the degree of operating leverage change as the quantity sold
Increases?
To measure the business risk the DOL measures the EBIT’s percentage change to the level of output by one percent.
d. If Healthy Foods has an annual interest expense of $10,000, calculate the
degree of financial leverage at both 20,000 and 25,000 bags.
20,000 bags x $10 = 200,000 - $10,000 = 190,000 – 80,000 = 110,000
25,000 bags x $10 = 250,000 - $10,000 = 240,000 – 80,000 = 160,000
e. What is the degree of combined leverage at both sales levels?
a. is wrong
The variable costs of a bag of grapes is $5. The cost of 8000 bags (including fixed cost) is 80,000 plus 40,000, but the revenue from sales is only 80,000.
You need to sell more to break even.
DCL= % Change in EPS/ % Change in Sales = DOL x DFL
To calculate the degree of combined leverage (DCL), you need to multiply the degree of operating leverage (DOL) by the degree of financial leverage (DFL).
The formula for DCL is: DCL = DOL x DFL
In this case, you have already calculated the DOL for 20,000 bags and 25,000 bags (which are 4.6 and 5.0, respectively).
Now, to calculate the DFL, you need to use the formula:
DFL = (EBIT / (EBIT - Interest Expense))
Let's calculate the DFL for both 20,000 bags and 25,000 bags.
For 20,000 bags:
EBIT = (20,000 bags x $10) - ($80,000 + ($0.10 x 50 lbs x 20,000 bags))
= $200,000 - ($80,000 + $100,000)
= $20,000
DFL = (EBIT / (EBIT - Interest Expense))
= ($20,000 / ($20,000 - $10,000))
= ($20,000 / $10,000)
= 2
For 25,000 bags:
EBIT = (25,000 bags x $10) - ($80,000 + ($0.10 x 50 lbs x 25,000 bags))
= $250,000 - ($80,000 + $125,000)
= $45,000
DFL = (EBIT / (EBIT - Interest Expense))
= ($45,000 / ($45,000 - $10,000))
= ($45,000 / $35,000)
= 1.286
Now, to calculate the DCL for both 20,000 bags and 25,000 bags, you need to multiply the DOL and DFL values.
For 20,000 bags:
DCL = DOL x DFL
= 4.6 x 2
= 9.2
For 25,000 bags:
DCL = DOL x DFL
= 5.0 x 1.286
= 6.43
Therefore, the degree of combined leverage at sales levels of 20,000 bags and 25,000 bags is 9.2 and 6.43, respectively.