Break Even Analysis Healthy Foods Inc.
Product 50 lb. bags
Price $12.50 Per bag
Fixed Costs $68,000
Variable Costs $0.15 Per lb.
Annual Interest Exp $7,500
a. What is the break-even point in bags?
b. Calculate the profit or loss on 12,000 bags and 25,000 bags.
c. What is the degree of operating leverage at 20,000 bags and
25,000 bags? Why does the degree of operating leverage
change as the quantity sold increases?
d. If Healthy Foods has an annual interest expense
a. To calculate the break-even point in bags, we need to determine the number of bags that need to be sold in order to cover all costs. The formula for break-even point is:
Break-even point (in units) = Fixed Costs / (Price per unit - Variable Costs per unit)
In this case, the fixed costs are $68,000, the price per bag is $12.50, and the variable costs per bag is $0.15 per pound. Since each bag is 50 pounds, the variable cost per bag is $0.15 x 50 = $7.50.
Plugging these values into the formula, we get:
Break-even point (in units) = 68,000 / (12.50 - 7.50) = 13,600 bags
Therefore, the break-even point in bags is 13,600.
b. To calculate the profit or loss on a given number of bags, we need to know the total revenue and the total costs.
Total revenue = Number of bags x Price per bag
Total costs = Fixed Costs + (Variable Costs per bag x Number of bags)
For 12,000 bags:
Total revenue = 12,000 x 12.50 = $150,000
Total costs = 68,000 + (7.50 x 12,000) = $158,000
Profit/Loss = Total revenue - Total costs = 150,000 - 158,000 = -$8,000 (a loss of $8,000)
For 25,000 bags:
Total revenue = 25,000 x 12.50 = $312,500
Total costs = 68,000 + (7.50 x 25,000) = $318,000
Profit/Loss = Total revenue - Total costs = 312,500 - 318,000 = -$5,500 (a loss of $5,500)
c. The degree of operating leverage measures the change in operating income (profit) with respect to changes in quantity sold. It is calculated as:
Degree of Operating Leverage = Contribution Margin / Operating Income
The contribution margin is the difference between the selling price and variable costs per unit. In this case, the contribution margin per bag is $12.50 - $7.50 = $5.
At 20,000 bags:
Total revenue = 20,000 x 12.50 = $250,000
Total costs = 68,000 + (7.50 x 20,000) = $233,000
Operating Income = Total revenue - Total costs = 250,000 - 233,000 = $17,000
Degree of Operating Leverage = 5 / 17,000 = 0.000294
At 25,000 bags:
Total revenue = 25,000 x 12.50 = $312,500
Total costs = 68,000 + (7.50 x 25,000) = $318,000
Operating Income = Total revenue - Total costs = 312,500 - 318,000 = -$5,500 (a loss of $5,500)
Degree of Operating Leverage = 5 / -5,500 = -0.000909
The degree of operating leverage increases when the quantity sold increases because fixed costs are spread over a larger number of units, resulting in a higher contribution margin. As a result, a change in quantity sold has a bigger impact on the operating income.
d. The question seems to be incomplete. Please provide the missing information, and I will be happy to assist you further.