Healthy Foods Inc. sells 50-pound bags of grapes to the military for $10 a bag.

Question

Healthy Foods Inc. sells 50-pound bags of grapes to the military for $10 a bag. The fixed costs of this operation are $90,000, while the variable costs of grapes are $.10 per pound.

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

Calculate the profit or loss (EBIT) on 14,000 bags and on 33,000 bags. (Input all amounts as positive values. Round your answers to the nearest whole number.)

What is the degree of operating leverage at 22,000 bags and at 33,000 bags? (Round your answers to 2 decimal places.)

If Healthy Foods has an annual interest expense of $9,000, calculate the degree of financial leverage at both 22,000 and 33,000 bags. (Round your answers to 2 decimal places.)

What is the degree of combined leverage at both 22,000 and 33,000 bags? (Round your answers to 2 decimal places.)

Healthy Foods Inc. sells 50-pound bags of grapes to the military for $10 a bag. The fixed costs of this operation are $90,000, while the variable costs of grapes are $.10 per pound.

Explanation / Answer

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

= Fixed cost/Contribution per unit = 90000/(10 - 0.1*50) = 90000/(10 - 5) = 18,000 bags.

b. Calculate the profit or loss (EBIT) on 14,000 bags and on 33,000 bags. (Input all amounts as positive values. Round your answers to the nearest whole number.)

EBIT for 14000 bags = 14000*5 (contribution per bag) - 90000 (fixed cost) = ($20,000)

EBIT for 33,000 bags = 33000*5 - 90000 = $75,000

c. What is the degree of operating leverage at 22,000 bags and at 33,000 bags? (Round your answers to 2 decimal places.)

DOL = Contribution/EBIT

DOL at 22000 bags = 22000*5/(22000*5 - 90000) = 110000/20000 = 5.5

DOL at 33000 bags = 33000*5/(33000*5 - 90000) = 165000/75000 = 2.2

d. If Healthy Foods has an annual interest expense of $9,000, calculate the degree of financial leverage at both 22,000 and 33,000 bags. (Round your answers to 2 decimal places.)

DFL = EBIT/EBT

DFL at 22000 units = 20000/(20000 - 9000) = 1.82

DFL at 33000 units = 75000/(75000 - 9000) = 1.14

e. What is the degree of combined leverage at both 22,000 and 33,000 bags? (Round your answers to 2 decimal places.)

DCL = DOL*DFL or Contribution/EBT

DCL @ 22000 units = 5.5*1.82 = 10.01 (110000/11000 = 10.0)

DCL @ 33000 units = 2.2*1.14 = 2.51 (165000/66000 = 2.5)

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