Question

Healthy Foods Inc. sells 60-pound bags of grapes to the military for $15 a bag. The fixed costs of this operation are $90,000, while the varlable costs of grapes are $0.15 per pound. a. What is the break-even point in bags? (Round your answer to 2 decimal places.) bags Break-even point b. Calculate the profit or loss (EBIT) on 14.000 bags and on 35,000 bags Bags Profit/Loss Amount 14,000 35,000 c. What is the degree of operating leverage at 21,000 bags and at 35,000 bags? (Round your answers to 2 decimal places.) Degree of Operating Leverage Bags 21,000 35,000

Answer 1

Break even point = Fixed costs/(Selling price per bag – variable costs per bag)

= 90,000/(15-0.15*60)

= 15,000 bags

Bags	Profit/Loss	Amount
14,000	Loss	(6,000)
35,000	Profit	120,000

Degree of operating Leverage = Contribution Margin/Operating Income

Bags	Profit/Loss	DOL
21,000	36,000	3.5
35,000	120,000	1.75

Degree of Financial Leverage = EBIT/EBT

Bags	EBIT	EBT	DFL
21,000	36,000	19,000	1.894737
35,000	120,000	103,000	1.165049

Degree of combined leverage = Degree of operating leverage*Degree of financial leverage

Bags	EBIT	EBT	DFL	DOL	DCL
21,000	36,000	19,000	1.894737	3.5	6.631579
35,000	120,000	103,000	1.165049	1.75	2.038835