Healthy food Inc sells 50lb 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 lb.
1. what us the break even point
2. what is the degree of combined leverage at both sales levels.
2. What two sales levels are you refering to?
As for part 1, there must be s mistake somewhere. Is it $10 per lb (as you state) or $10 per bag? Or less? You will never make a profit selling 50lb bags for $10, if the variable cost is $10 per lb ($500 per bag).
For question number 2 the teacher states operating leverage and financial leverage but that is it I am totally confused? Thanks for the help
To find the break-even point, we need to determine the number of bags of grapes that need to be sold in order to cover all the fixed and variable costs. The total cost for each bag of grapes can be calculated as the sum of fixed costs and variable costs:
Total Cost = Fixed Cost + (Variable Cost per lb * Weight per bag)
1. Break-even point:
Let's calculate the total cost per bag:
Total Cost per bag = $80,000 + ($10/lb * 50 lb)
= $80,000 + $500
= $80,500
The break-even point is the number of bags that need to be sold to cover these costs. Since each bag is sold for $10, the break-even point can be calculated as follows:
Break-even point = Total Cost / Selling Price per bag
= $80,500 / $10
= 8,050 bags
Therefore, the break-even point would be 8,050 bags.
2. Degree of Combined Leverage (DCL):
The degree of combined leverage measures the sensitivity of net profit to changes in sales. It can be calculated as the product of the degree of operating leverage and the degree of financial leverage.
The degree of operating leverage (DOL) can be calculated as follows:
DOL = Contribution Margin / Net Profit
And the degree of financial leverage (DFL) can be calculated as:
DFL = EBIT / Net Profit
Let's assume the contribution margin is 80% (0.80) and the net profit is 10%. We can use these values to calculate the DOL:
DOL = 0.80 / 0.10
= 8
The EBIT (Earnings Before Interest and Taxes) can be calculated as follows:
EBIT = Selling Price per bag * Number of bags - Variable Cost per bag * Number of bags - Fixed Costs
= $10 * 8,050 - $500 * 8,050 - $80,000
= $80,500 - $4,025,000 - $80,000
= -$3,924,500
Using the EBIT, we can calculate the DFL:
DFL = -$3,924,500 / 10%
= -$39,245,000
The degree of combined leverage (DCL) can be calculated as follows:
DCL = DOL * DFL
= 8 * -$39,245,000
= -$313,960,000
The degree of combined leverage at both sales levels would be -$313,960,000.