Question

United Snack Company sells 40-pound bags of peanuts to university dormitories for $42 a bag. The fixed costs of this operation are $417,120, while the variable costs of peanuts are $0.26 per pound.

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

b. Calculate the profit or loss (EBIT) on 12,000 bags and on 25,000 bags.
  

c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags? (Round your answers to 2 decimal places.)
  

d. If United Snack Company has an annual interest expense of $26,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags. (Round your answers to 2 decimal places.)
  

e. What is the degree of combined leverage at both a sales level of 20,000 bags and 25,000 bags? (Round your answers to 2 decimal places.)
  

Answer 1

A)

Price per bag P=$42

Cost per bag C= 40*0.26=$10.4

Fixed cost F=$417120

Contribution per bag=42-10.4=$31.6

So Break even point = Fixed price /contribution per bag=417120/31.6=13200 bags

B)

For 20000 bags

Contribution =20000*31.6=$632000

EBIT=Contribution -Fixed cost=632000-417120=$214880

For 25000 bags

Contribution =25000*31.6=$790000

EBIT=Contribution -Fixed cost=790000-417120=$372880

C)

Degree Operating leverage for 20000 bags =contribution/EBIT = 632000/214880=2.94

Degree Operating leverage for 25000 bags =contribution/EBIT = 790000/372880=2.12

D)

Degree of financial leverage for 20000 bags =EBIT/(EBIT-Interest)=214880/(214880-26000)=1.14

Degree of financial leverage for 25000 bags =EBIT/(EBIT-Interest)=372880/(372880-26000)=1.07

E)

Degree of combined leverage for 20000 bags =contribution/(EBIT-Interest)=632000/(214880-26000)=3.35

Degree of combined leverage for 25000 bags =contribution /(EBIT-Interest)=790000/(372880-26000)=2.28