Question

United Snack Company sells 60-pound bags of peanuts to university dormitories for $28 a bag. The fixed costs of this operation are $240,700, while the variable costs of peanuts are $0.19 per pound.

a. What is the break-even point in bags?
  

b. Calculate the profit or loss (EBIT) on 11,000 bags and on 24,000 bags.
  

c. What is the degree of operating leverage at 19,000 bags and at 24,000 bags? (Round your answers to 2 decimal places.)
  

d. If United Snack Company has an annual interest expense of $19,000, calculate the degree of financial leverage at both 19,000 and 24,000 bags. (Round your answers to 2 decimal places.)
  

e. What is the degree of combined leverage at both a sales level of 19,000 bags and 24,000 bags? (Round your answers to 2 decimal places.)
  

Answer 1

a) Let the break even point be x

28x = $240,700 + 0.19*60*x

x = 240700/(28-11.4) = 14,500

b) For 11000 bags:

Sales = 11000*28 = 308,000

Fixed cost = $240,700

Variable costs = 0.19*60*11000 = 125,400

EBIT = Sales - FC - VC = 308000 - 240700 - 125400 = -58,100

For 24000 bags:

Sales = 24000*28 = 672,000

Fixed cost = $240,700

Variable costs = 0.19*60*24000 = 273,600

EBIT = Sales - FC - VC = 672000 - 240700 - 273600 = 157,700

c) For 19000 bags:

Sales = 19000*28 = 532,000

Fixed cost = $240,700

Variable costs = 0.19*60*19000 = 216,600

DOL = (Sales-VC)/(Sales - FC - VC) = (532000-216600)/(532000 - 240700 - 216600) = 4.22

For 24000 bags:

Sales = 24000*28 = 672,000

Fixed cost = $240,700

Variable costs = 0.19*60*24000 = 273,600

DOL = (Sales-VC)/(Sales - FC - VC) = (672000-273600)/(672000 - 240700 - 273600) = 2.53

d) DFL = EBIT/(EBIT-Interest)

For 19000 bags:

DFL = 74700/(74700-19000) = 1.34

For 24000 bags:

DFL = 157700/(157700-19000) = 1.14

e) DCL = DOL*DFL

For 19000 bags: DCL = 4.22*1.34 = 5.65

For 24000 bags: DCL = 2.53*1.14 = 2.88