Bad Food, Inc. sells 100- pound bags of pre-cooked French fries to fast food out

Question

Bad Food, Inc. sells 100- pound bags of pre-cooked French fries to fast food outlets for $12 a bag. The fixed costs of this operation are $95,000, while the variable costs of the French fries are $.07 per pound.
a. What is the break-even point in bags?
b. Calculate the profit or loss on 15,000 bags and on 30,000 bags.
c. What is the degree of operating leverage at 22,000 bags and at 33,000 bags? Why does the degree of operating leverage change as the quantity sold increases?
d. If Bad Food has an annual interest expense of $12,000, calculate the degree of financial leverage at both 22,000 and 33,000 bags.
e. What is the degree of combined leverage at both sales levels?

Explanation / Answer

15000 bags

30000 bags

($20,000)

$55,000

22000 bags

33000 bags

= 7.33

= 2.36

22000 bags

33000 bags

= 5

= 1.21

22000 bags

33000 bags

= 36.67

= 2.84

Salling price $12 Variable cost (100*0.07) $7 Contribution per bag $5 Break Even Poin inbags = Fixed cost / Contribution per bag = 95000 / 5 = 19000 bags

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