Question

Healthy Foods Inc. sells 50-pound bags of grapes to the military for $25 a bag. The fixed costs of this operation are $95,000, while the variable costs of grapes are $0.25 per pound.

a. What is the break-even point in bags? (Round your answer to 2 decimal places.)
  

b. Calculate the profit or loss (EBIT) on 10,000 bags and on 31,000 bags.
  

c. What is the degree of operating leverage at 22,000 bags and at 31,000 bags? (Round your answers to 2 decimal places.)
  

d. If Healthy Foods has an annual interest expense of $8,000, calculate the degree of financial leverage at both 22,000 and 31,000 bags. (Round your answers to 2 decimal places.)
  

e. What is the degree of combined leverage at both 22,000 and 31,000 bags? (Round your answers to 2 decimal places.)
  

Answer 1

A) break even sales = fixed costs/ contribution

Contribution = sale price - variable costs = $ 25 per bag - 50pound per bag × 0.25 per pound =$ 12.5 per bag

Break even point = $ 95,000 /12.5 = 7,600 bag

B) EBIT :_

Particulars	At 10,000 units	At 31,000 units
Sales	250,000	775,000
Less- variable costs	125,000	387,500
Contribution	125,000	387,000
Less-fixed cost	95,000	95,000
EBIT	30,000	292,500

C) Degree of operating leverage:_

Particulars	At 22,000 units	At 31,000 units
Sales	550,000	775,000
Less- variable costs	275,000	387,500
Contribution	275,000	387,500
Less-fixed cost	95,000	95,000
EBIT	180,000	292,500
Degree of operating leverage	1.53	1.32

DOL = CONTRIBUTION / EBIT

D) Degree of financial leverage:

Particulars	At 22,000 units	At 31,000 units
Sales	550,000	775,000
Less- variable costs	275,000	387,500
Contribution	275,000	387,500
Less-fixed cost	95,000	95,000
EBIT	180,000	292,500
Less- interest payment	8000	8000
EBT	172,000	284,500
Degree of Financial leverage	1.05	1.03

DFL = EBIT / EBT

E) Combined leverage:-

Particulars	at 22,000	At 31,000
DOL	1.53	1.32
DFL	1.05	1.03
Combined leverage	1.61	1.36

Combined leverage = DOL ×DFL