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

Assistance needed.

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To find the break-even point in bags, you need to divide the fixed costs by the difference between the selling price and the variable cost per unit. In this case, the fixed costs are $80,000, the selling price is $10.00, and the variable cost per pound is $0.10. Using the formula:

Break-even point = Fixed costs / (Selling price - Variable cost per unit)

Break-even point = $80,000 / ($10.00 - $0.10)
= $80,000 / $9.90
= 8080.8 units

Since the question asks for the break-even point in bags, and each bag weighs 50 pounds, you need to divide the number of units by 50:

Break-even point in bags = 8080.8 units / 50
= 161.62 bags

Therefore, the break-even point in bags is approximately 161.62 bags.

To calculate the profit or loss on 12,000 bags and 25,000 bags, you need to first calculate the sales revenue, which is the number of bags multiplied by the selling price per bag. Then subtract the fixed costs and the variable costs per bag to get the profit or loss.

For 12,000 bags:

Sales revenue = 12,000 bags x $10.00 per bag = $120,000
Variable costs = 12,000 bags x $0.10 per pound = $1,200
Profit (Loss) = Sales revenue - Fixed costs - Variable costs
= $120,000 - $80,000 - $1,200
= $31,800

Therefore, the profit on 12,000 bags is $31,800.

Similarly, for 25,000 bags:

Sales revenue = 25,000 bags x $10.00 per bag = $250,000
Variable costs = 25,000 bags x $0.10 per pound = $2,500
Profit (Loss) = Sales revenue - Fixed costs - Variable costs
= $250,000 - $80,000 - $2,500
= $167,500

Therefore, the profit on 25,000 bags is $167,500.

To calculate the degree of operating leverage (DOL), you need to divide the percentage change in profit by the percentage change in sales. It measures the sensitivity of profit to changes in sales volume.

DOL = % Change in Profit / % Change in Sales

To find the percentage change in profit, subtract the profit at the current sales level from the profit at the previous sales level, and divide it by the profit at the previous sales level:

Percentage change in profit = (Profit at current sales level - Profit at previous sales level) / Profit at previous sales level

For example, at 20,000 bags:

Percentage change in profit = ($31,911 - $31,800) / $31,800
= $111 / $31,800
= 0.0035

To find the percentage change in sales, subtract the current sales level from the previous sales level, and divide it by the previous sales level:

Percentage change in sales = (Current sales level - Previous sales level) / Previous sales level

For example, at 20,000 bags:

Percentage change in sales = (20,000 - 12,000) / 12,000
= 8,000 / 12,000
= 0.67

DOL = 0.0035 / 0.67
= 0.0052

Therefore, the degree of operating leverage at 20,000 bags is 0.0052.

Similarly, you can calculate the DOL at 25,000 bags.

To calculate the degree of financial leverage (DFL), you need to divide the percentage change in earnings before interest and taxes (EBIT) by the percentage change in profit. It measures the sensitivity of earnings before interest and taxes to changes in profit.

DFL = % Change in EBIT / % Change in Profit

However, in this case, we are not given the EBIT, so we cannot calculate the DFL.

The degree of combined leverage (DCL) is the product of the degree of operating leverage and the degree of financial leverage.

DCL = DOL * DFL

Since we cannot calculate the DFL, we cannot calculate the DCL.

To calculate the degree of operating leverage (DOL), you use the formula:

DOL = Contribution Margin / Operating Income

The Contribution Margin can be determined by subtracting variable costs from sales.

For 20,000 bags:

Sales = 20,000 x $10 = $200,000
Variable Costs = 20,000 x $0.10 = $2,000
Contribution Margin = $200,000 - $2,000 = $198,000
Operating Income = $198,000 - $80,000 = $118,000

DOL = $198,000 / $118,000 = 1.68

For 25,000 bags:

Sales = 25,000 x $10 = $250,000
Variable Costs = 25,000 x $0.10 = $2,500
Contribution Margin = $250,000 - $2,500 = $247,500
Operating Income = $247,500 - $80,000 = $167,500

DOL = $247,500 / $167,500 = 1.48

The degree of operating leverage decreases as the quantity sold increases. This is because fixed costs stay the same while the contribution margin increases.

To calculate the degree of financial leverage (DFL), you use the formula:

DFL = EBIT / EBIT - Interest

For 20,000 bags:

EBIT = $118,000
Interest = $10,000

DFL = $118,000 / ($118,000 - $10,000) = 1.19

For 25,000 bags:

EBIT = $167,500
Interest = $10,000

DFL = $167,500 / ($167,500 - $10,000) = 1.08

To calculate the degree of combined leverage (DCL), you use the formula:

DCL = DOL x DFL

For 20,000 bags:

DCL = 1.68 x 1.19 = 2

For 25,000 bags:

DCL = 1.48 x 1.08 = 1.60

The degree of combined leverage represents the impact of both operating and financial leverage on the company's earning potential.