Healthy Foods Inc. sells 40-pound bags of grapes to the military for $15 a bag.

Question

Healthy Foods Inc. sells 40-pound bags of grapes to the military for $15 a bag. The fixed costs of this operation are $91,000, while the variable costs of grapes are $.20 per pound.

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

Calculate the profit or loss (EBIT) on 10,900 bags and on 27,000 bags. (Input all amounts as positive values. Round your answers to the nearest whole number.)

What is the degree of operating leverage at 18,900 bags and at 27,000 bags? (Round your answers to 2 decimal places.)

If Healthy Foods has an annual interest expense of $10,000, calculate the degree of financial leverage at both 18,900 and 27,000 bags. (Round your answers to 2 decimal places.)

What is the degree of combined leverage at both 18,900 and 27,000 bags? (Round your answers to 2 decimal places.)

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

Explanation / Answer

a)

let x be the no of bags sold

at break even

x * 15 - 91000 - x * 40*0.2 = 0

x = 13000 bags .................ans

b)

on 10900 bags

EBIT = 10900 * 15 -91000 - 10900 * 40*0.2 = -14700 (loss)

on 27000 bags

EBIT = 27000 * 15 -91000 - 27000 * 40*0.2 = 98000 (profit)

c)

at 18900

degree of operting leverage = 18900 * 15 - 18900 *40*0.2 / (18900 * 15 - 18900 *40*0.2 - 91000)

= 132300/ 41300 = 3.20

at 27000

degree of operting leverage = 27000 * 15 - 27000 *40*0.2 / (27000 * 15 - 27000 *40*0.2 - 91000)

= 18900/98000 = 1.93

d)

at 18900

degree of financial leverage = 41300/41300-10000 = 1.32

at 27000

degree of financial leverage = 98000/98000-10000 = 1.11

e)

DCL = DFL * DOL

at 18900

degree of combined leverage = 3.20 * 1.32 = 4.22

at 27000

degree of combined leverage = 1.93 * 1.11 = 2.14

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