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.Calculate the profit or loss on 12,000 bags and on 25,000 bags. Can you please walk me through on how to come to the answer. I am so confused.
2.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.
Do I multiply by the 10,000 in the second question. And in the first one I am really lost know.
To calculate the profit or loss, you need to use the formula: Profit/Loss = (Revenue - Total Costs).
1. For 12,000 bags:
Step 1: Calculate the revenue:
Revenue = Number of bags * Selling price per bag
Revenue = 12,000 bags * $10 per bag
Revenue = $120,000
Step 2: Calculate the total costs:
Total Costs = Fixed Costs + (Variable Costs per lb * lb per bag * Number of bags)
Total Costs = $80,000 + ($10 per lb * 50 lb per bag * 12,000 bags)
Total Costs = $80,000 + $6,000,000
Total Costs = $6,080,000
Step 3: Calculate profit/loss:
Profit/Loss = Revenue - Total Costs
Profit/Loss = $120,000 - $6,080,000
Profit/Loss = -$5,960,000
Therefore, the profit/loss on 12,000 bags is -$5,960,000, indicating a loss.
For 25,000 bags:
Step 1: Calculate the revenue:
Revenue = Number of bags * Selling price per bag
Revenue = 25,000 bags * $10 per bag
Revenue = $250,000
Step 2: Calculate the total costs:
Total Costs = Fixed Costs + (Variable Costs per lb * lb per bag * Number of bags)
Total Costs = $80,000 + ($10 per lb * 50 lb per bag * 25,000 bags)
Total Costs = $80,000 + $12,500,000
Total Costs = $12,580,000
Step 3: Calculate profit/loss:
Profit/Loss = Revenue - Total Costs
Profit/Loss = $250,000 - $12,580,000
Profit/Loss = -$12,330,000
Therefore, the profit/loss on 25,000 bags is -$12,330,000, indicating a loss.
2. To calculate the degree of financial leverage, you need to use the formula: Degree of Financial Leverage = % Change in Earnings / % Change in Sales.
Assuming the % Change in Earnings refers to the change in profit/loss, and % Change in Sales refers to the change in bags sold:
For 20,000 bags:
% Change in Earnings = (Profit/Loss on 20,000 bags - Profit/Loss on 12,000 bags) / Profit/Loss on 12,000 bags
% Change in Earnings = (-Profit/Loss on 12,000 bags - (-Profit/Loss on 20,000 bags)) / (-Profit/Loss on 12,000 bags)
% Change in Earnings = ($5,960,000 - $12,330,000) / $5,960,000
% Change in Earnings = -$6,370,000 / $5,960,000
% Change in Earnings = -1.070
(Note: the negative sign indicates a decrease in profit)
For 25,000 bags:
% Change in Earnings = (Profit/Loss on 25,000 bags - Profit/Loss on 12,000 bags) / Profit/Loss on 12,000 bags
% Change in Earnings = (-Profit/Loss on 12,000 bags - (-Profit/Loss on 25,000 bags)) / (-Profit/Loss on 12,000 bags)
% Change in Earnings = ($5,960,000 - $12,330,000) / $5,960,000
% Change in Earnings = -$6,370,000 / $5,960,000
% Change in Earnings = -1.070
Since the % Change in Earnings is the same for both 20,000 and 25,000 bags, the degree of financial leverage is the same in both cases.
To calculate the profit or loss on a certain number of bags, you need to understand the formula for calculating profit. Profit is calculated by subtracting the total costs from the total revenue.
Let's break down the calculation step-by-step:
1. Profit or Loss on a specific number of bags:
- First, calculate the total revenue. To do this, multiply the price per bag ($10) by the number of bags.
- Total revenue = Price per bag * Number of bags
- Next, calculate the total variable costs. To do this, multiply the variable cost per lb ($10) by the weight per bag (50 lb) and then by the number of bags.
- Total variable costs = Variable cost per lb * Weight per bag * Number of bags
- Now, you have the total revenue and total variable costs. Subtract the total variable costs from the total revenue to get the profit or loss.
- Profit or Loss = Total Revenue - Total Variable Costs
2. Degree of Financial Leverage:
The degree of financial leverage measures the change in profit as a result of a change in sales volume. It shows how sensitive the profit is to changes in sales.
- The formula for the degree of financial leverage is:
Degree of Financial Leverage = (EBIT / EBIT - Interest Expense)
EBIT (Earnings Before Interest and Taxes) is the profit before considering the interest expense.
- To calculate EBIT, subtract the total fixed costs (which include the interest expense) from the total revenue:
EBIT = Total Revenue - Total Fixed Costs
- Now you can substitute the EBIT value in the formula to find the degree of financial leverage.
Now, let's apply these steps to answer your specific questions:
1. Profit or Loss on 12,000 bags:
- Total Revenue = $10 * 12,000 bags
- Total Variable Costs = $10/lb * 50 lb/bag * 12,000 bags
- Profit or Loss = Total Revenue - Total Variable Costs
2. Profit or Loss on 25,000 bags:
- Total Revenue = $10 * 25,000 bags
- Total Variable Costs = $10/lb * 50 lb/bag * 25,000 bags
- Profit or Loss = Total Revenue - Total Variable Costs
3. Degree of Financial Leverage at 20,000 bags:
- EBIT = Total Revenue - Total Fixed Costs (including the interest expense)
- Degree of Financial Leverage = EBIT / (EBIT - Interest Expense)
4. Degree of Financial Leverage at 25,000 bags:
- EBIT = Total Revenue - Total Fixed Costs
- Degree of Financial Leverage = EBIT / (EBIT - Interest Expense)
Remember to substitute the appropriate values based on the given information in each calculation.
I hope this explanation helps you understand how to approach these calculations.