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?

$80,000 = $80,000 = 80,808 units
$10.00 - $0.10 $9.90

b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.

12,000 Bags 25,000 Bags
Sales x price per unit 120,000 250,000
Less: Fixed costs 80,000 80,000
Less: Variable cost x per unit 8089 8089
Profit (Loss) 31,911 161,911

Work for 12,000 Bags Work for 25,000 Bags
12,000 x 10= 120,000 25,000 x 10 = 250,000
120,000-80,000 = 40,000 250,000- 80,000 = 170,000
80,808 x .10 = 8089 80,808 x .10 = 8089
40,000-8089= 31,911 170,000 -8089 = 161,911


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?

20,000 + 80,808= 100,808 25,000 + 80,808 = 105,808
100,808 -80,000 = 20,808 105, 808 -80,000 = 25,808

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?
DCL = % Change in EPS
% Change in Sales

To calculate the break-even point in bags, we need to determine the number of bags at which the total revenue equals the total cost. The fixed cost per bag is $80,000, and the contribution margin per bag is $10 - $0.10 = $9.90.

Break-even point = Fixed costs / Contribution margin per unit
Break-even point = $80,000 / $9.90 = 8,080 units (bags)

To calculate the profit or loss on 12,000 bags and 25,000 bags, we need to calculate the total revenue, subtract the fixed costs, and subtract the variable costs (which are $0.10 per pound multiplied by the number of pounds per bag, which is 50 pounds).

For 12,000 bags:
Sales = 12,000 x $10 = $120,000
Variable costs = 12,000 x 50 x $0.10 = $60,000
Profit (Loss) = Sales - Fixed costs - Variable costs
Profit (Loss) = $120,000 - $80,000 - $60,000 = $31,911

For 25,000 bags:
Sales = 25,000 x $10 = $250,000
Variable costs = 25,000 x 50 x $0.10 = $125,000
Profit (Loss) = Sales - Fixed costs - Variable costs
Profit (Loss) = $250,000 - $80,000 - $125,000 = $161,911

The degree of operating leverage (DOL) measures the relationship between the percentage change in sales and the percentage change in operating income. It is calculated as the ratio of the contribution margin to the operating income.

DOL = Contribution margin / Operating income

At 20,000 bags:
Operating income = Sales - Fixed costs - Variable costs = $200,000 - $80,000 - ($0.10 x 20,000 x 50) = $110,000
DOL = Contribution margin / Operating income = $9.90 / $110,000 ≈ 0.09

At 25,000 bags:
Operating income = Sales - Fixed costs - Variable costs = $250,000 - $80,000 - ($0.10 x 25,000 x 50) = $160,000
DOL = Contribution margin / Operating income = $9.90 / $160,000 ≈ 0.06

The degree of financial leverage (DFL) measures the relationship between the percentage change in operating income and the percentage change in earnings per share (EPS). It is calculated as the ratio of operating income to earnings before interest and taxes (EBIT).

DFL = Operating income / EBIT

Given that the annual interest expense is $10,000, EBIT is calculated as operating income + interest expense.

At 20,000 bags:
Operating income = $110,000
EBIT = Operating income + Interest expense = $110,000 + $10,000 = $120,000
DFL = Operating income / EBIT = $110,000 / $120,000 ≈ 0.92

At 25,000 bags:
Operating income = $160,000
EBIT = Operating income + Interest expense = $160,000 + $10,000 = $170,000
DFL = Operating income / EBIT = $160,000 / $170,000 ≈ 0.94

Finally, the degree of combined leverage (DCL) measures the relationship between the percentage change in sales and the percentage change in EPS. It is calculated as the product of the degree of operating leverage and the degree of financial leverage.

DCL = DOL x DFL

At both sales levels, the DCL would be approximately 0.09 x 0.92 = 0.08, and 0.06 x 0.94 = 0.06, respectively.