healthy foods inc, sell 50 pounds bags of grapes to military for $10 a bag. The

Question

healthy foods inc, sell 50 pounds bags of grapes to military for $10 a bag. The fixd cost of this operation are $80,000 while the variable cost of the grapes are $.10 per pound.
A. What is the break-even pint in bags?
b. Calculate the profit or loss 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?
what is the degree of operating leverage chang as the quantity sold increases?
d. If healthy foods has an annual interest expense of $10,000 calculate the degree of financial leverage at both 20,000 and 25,000 bags.
e. what is the degree of combined leverage at both sales levels?

Explanation / Answer

contribution/bag ($) = SP/bag - VC/bag = 10 - 50*0.1 =10 - 5 = 5 ($)
A)
Break-even point (qty) = FC / (contribution/bag) = 80,000/5 = 16,000 bags. (ANSWER)
B)
i)
At 12,000 bags, total contribution = 12,000*5 = 60,000 ($)
Uncovered FC = 80,000 - 60,000 =20,000 ($) = THIS IS LOSS (ANSWER)
ii)
At 25,000 bags, exceeds break-even point by 9,000 bags. the contribution on this goes entirely into profit.
So, there is profit = 9,000*5 = 45,000 ($) (ANSWER)
C)
Operating leverage OL = FC(without interest)/SALES
At 20,000 bags, OL = (80,000 - 10,000)/200,000 = 0.35 i.e. 35% (ANSWER)
At 25,000 bags, OL =(80,000 - 10.000) / 250,000 = 0.28 i.e. 28% (ANSWER)
As qty of sale increases, OL decreases.
Change in OL = 28 - 35 = - 7% i.e. decrease of 7% (ANSWER)
D)
Financial leverage FL = interest cost / sales
At 20,000 bags , FL = 10,000/200,000 = 0.05 = 5% (ANSWER)
At 25,000 bags, FL = 10,000/ 250,000 = 0.04 = 4% (ANSWER)
E)
Combined leverage, CL = (FC including INTEREST )/ SALES
At 20,000 bags CL = 80,000/200,000 = 0.40 = 40% (ANSWER)
At 25,000 bags, CL = 80,000/250,000 = 0.32 =32% (ANSWER)

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