Question

United Snack Company sells 60-pound bags of peanuts to university dormitories for $40 a bag. The fixed costs of this operation are $305,000, while the variable costs of peanuts are $0.25 per pound.

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

	Break-even point bags

b. Calculate the profit or loss (EBIT) on 5,000 bags and on 18,000 bags.

	Bags Profit/Loss Amount 5,000 18,000

c. What is the degree of operating leverage at 17,000 bags and at 22,000 bags? (Round your answers to 2 decimal places.)

Bags	Degree of Operating Leverage
17,000
22,000

d. If United Snack Company has an annual interest expense of $25,000, calculate the degree of financial leverage at both 17,000 and 22,000 bags. (Round your answers to 2 decimal places.)

Bags	Degree of Financial Leverage
17,000
22,000

e. What is the degree of combined leverage at both a sales level of 17,000 bags and 22,000 bags? (Round your answers to 2 decimal places.)

Bags	Degree of Combined Leverage
17,000
22,000

Answer 1

	Given that
ans a
	Variable cost per bag = 0.25*60			15
	Contribution = 40-15			25
	fixed cost =			305,000
	Break even bag = 305000/25			12200
ans b	Calculate the profit or loss (EBIT) on 5,000 bags and on 18,000 bags.
i	Unit	5000	18000
ii	Contribution per bag=	25	25
iii=i*ii	Total contribution	125000	450000
iv	fixed cost	305,000	305,000
v=iii-iv	Profit/(loss)	-180,000	145,000
ans c	What is the degree of operating leverage at 17,000 bags and at 22,000 bags
	DOL = Contribution margin/Net profit
i	Unit	17000	22000
ii	Contribution per bag=	25	25
iii=i*ii	Total contribution	425000	550000
iv	fixed cost	305,000	305,000
v=iii-iv	Profit/(loss)	120,000	245,000
vi=iii/v	DOL	3.54	2.24
ans d	If United Snack Company has an annual interest expense of $25,000, calculate the degree of financial leverage at both 17,000 and 22,000 bags
	DOFL = EBIT/(EBIT-Interest)
i	Unit	17000	22000
ii	Contribution per bag=	25	25
iii=i*ii	Total contribution	425000	550000
iv	fixed cost	305,000	305,000
v=iii-iv	EBIT	120,000	245,000
vi	Interest	25,000	25,000
vii	EBIT-Interest	95,000	220,000
viii=v/vii	DOFL	1.26	1.11
Answer e	Combined leverage = DOL*DOFL
	Unit	17000	22000
	DOL	3.54	2.24
	DOFL	1.26	1.11
	DOCL	4.47	2.50