Posted by **scooby9132002** on Thursday, July 30, 2009 at 1:33pm.

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?

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