Healthy Food, 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 coast of the grapes are $.10 per pound.
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Why does the degree of operating leaverage changes as the quantity sold increase?
To calculate the total cost of selling the grapes to the military, we need to consider both the fixed costs and the variable costs.
Fixed costs refer to costs that do not change with the quantity produced or sold. In this case, the fixed costs are $80,000.
Variable costs, on the other hand, are costs that vary with the quantity produced or sold. We are given that the variable cost of the grapes is $0.10 per pound.
To calculate the total variable cost, we need to multiply the variable cost per pound by the total weight of the grapes sold.
Weight of grapes = 50 pounds per bag
Total weight sold = 50 pounds * Number of bags
The total variable cost can be calculated as follows:
Total variable cost = Variable cost per pound * Total weight sold
We now have all the information to calculate the total cost:
Total cost = Fixed costs + Total variable cost
For example, if they sell 100 bags of grapes, the calculation would be as follows:
Total weight sold = 50 pounds * 100 bags = 5000 pounds
Total variable cost = $0.10 per pound * 5000 pounds = $500
Total cost = $80,000 (fixed costs) + $500 (total variable cost) = $80,500
So, when Healthy Food, Inc. sells 100 bags of grapes, the total cost of the operation would be $80,500.