Question

Healthy Foods Inc. sells 50-pound bags of grapes to the military for $20 a bag. The fixed costs of this operation are $110,000, while the variable costs of grapes are $0.20 per pound. a. What is the break-even point in bags? (Round your answer to 2 decimal places.) Break-even point bags b. Calculate the profit or loss (EBIT) on 10,000 bags and on 20,000 bags. Profit/Loss Amount Bags 10,000 20,000 c. What is the degree of operating leverage at 18,000 bags and at 20,000 bags? (Round your answers to 2 decimal places.) Bags Degree of Operating Leverage 18,000 20,000

Answer 1

A bag contains 50 pounds of grapes

Variable cost per pound of grape is $0.20

Therefore, variable cost per bag of grapes = 50 * $0.20 = $10.00

Selling Price of a bag is $20

That means contribution per bag is $20 - $10 = $10

We know, Price-Volume Ratio (P/V ratio) = Contribution/Sales

Therefore, P/V ratio = $10 / $20 = 0.50 or 50%

We also know that

$\frac{Fixed ~ Cost}{P/V~ratio} = Break~even~sales~in ~dollars$

i.e. $\frac{110000}{0.50} = 220000$

Now that we have break even sales in $, just divide it by sale price per unit then you will get Break-even- Quantity.

ie. $\frac{220000}{20} = 11000$

Therefore, Break Even Point = 11000 bags.

For Leverages refer the tables below.

Particulars Break Even Quantity 10000 bags 20000 bags 18000 bags Selling price per bag (a) 20 20 20 20 Sales units (b) 20,000 11,000 10,000 18,000 Total Selling price (axb) 220,000 200,000 360,000 400,000 Less: Variable Cost (b) x $10 (110,000) (100,000) (180,000) (200,000) Contribution 110,000 100,000 180,000 200,000 (110,000) Less: Fixed Cost (110,000) (110,000) (110,000) Profit/Loss (EBIT) (10,000) 70,000 90,000 Less: Interest Expenes (13,000) (13,000) EBT ЕВT 57,000 000רר

18000 bags 20000 bags Leverages Operating Leverage 2.57 2.22 (Contribution / EBIT) (180000/70000) (200000/90000) Financial Leverage 1.17 1.23 (EBIT/EBT) (70000/57000) (90000/77000) Combined Leverage 3.16 2.60 |(Operating Leverage x Financial Leverage) (2.57x 1.23) (2.22 x 1.17)