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
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).
DCL = DOL x DFL
For 20,000 bags:
DOL = 4.6 (from part c)
DFL = EBIT / (EBIT - Interest)
= 110,000 / (110,000 - 10,000)
= 110,000 / 100,000
= 1.1
DCL = 4.6 x 1.1
= 5.06
For 25,000 bags:
DOL = 5.0 (from part c)
DFL = EBIT / (EBIT - Interest)
= 160,000 / (160,000 - 10,000)
= 160,000 / 150,000
= 1.0667
DCL = 5.0 x 1.0667
= 5.3335
So, the degree of combined leverage at 20,000 bags is approximately 5.06, and at 25,000 bags is approximately 5.3335.
Certainly! To calculate the degree of combined leverage (DCL), you need to multiply the degree of operating leverage (DOL) and the degree of financial leverage (DFL) together.
Given that DOL is 4.6 at 20,000 bags and 5.0 at 25,000 bags, and DFL is calculated as EBIT divided by EBIT minus interest, we can calculate DFL as follows:
At 20,000 bags:
EBIT = 120,000 - 80,000 - (0.10 * 50 * 20,000) = $40,000
DFL = EBIT / (EBIT - Interest) = 40,000 / (40,000 - 10,000) = 1.3333
At 25,000 bags:
EBIT = 250,000 - 80,000 - (0.10 * 50 * 25,000) = $95,000
DFL = EBIT / (EBIT - Interest) = 95,000 / (95,000 - 10,000) = 1.122
Now, to calculate the DCL, you need to multiply DOL and DFL together at each sales level:
At 20,000 bags:
DCL = DOL * DFL = 4.6 * 1.3333 = 6.146
At 25,000 bags:
DCL = DOL * DFL = 5.0 * 1.122 = 5.61
So, the degree of combined leverage at 20,000 bags is 6.146, and at 25,000 bags, it is 5.61.