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

I don't know e, but I know a and b don't make sense. If you loose money on 12,000 bags, and make money on 20,000 bags, then your breakeven point is not 8,000 bags.

I already answered (a) for you, yesterday. Bob Pursley is correct.

Certainly! 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).

In this case, the DOL at 20,000 bags is 4.6 (as you calculated earlier) and the DFL is the EBIT divided by EBIT minus interest expense. Since the EBIT is not provided in the information given, we can use the profit or loss calculation at 20,000 bags to find the EBIT.

From the profit or loss calculation, we know that at 20,000 bags the loss is $20,000. So the EBIT would be $20,000 minus the interest expense of $10,000, which is $10,000.

Using this, we can calculate the DFL:
DFL = EBIT / (EBIT - Interest Expense)
DFL = $10,000 / ($10,000 - $10,000)
DFL = $10,000 / $0
DFL is undefined in this case because dividing by zero is not possible.

The same calculation can be done for 25,000 bags to find the DFL at that level, and then multiply the DOL by the DFL to get the DCL.

Feel free to let me know if you have any further questions or need additional assistance!