Question

Healthy Foods Inc. sells 60-pound bags of grapes to the military for $15 a bag. The fixed costs of this operation are $90,000, while the variable costs of grapes are $0.15 per pound. a. What is the break-even point in bags? (Round your answer to 2 decimal places.) b. Calculate the profit or loss (EBIT) on 14,000 bags and on 35,000 bags. c. What is the degree of operating leverage at 21,000 bags and at 35,000 bags? (Round your answers to 2 decimal places.) d. If Healthy Foods has an annual interest expense of $17,000, calculate the degree of financial leverage at both 21,000 and 35,000 bags. (Round your answers to 2 decimal places.) e. What is the degree of combined leverage at both 21,000 and 35,000 bags? (Round your answers to 2 decimal places.)

Answer 1

BEP units: 15,000 60-pounds bags

(B)

14,000 generates 6,000 loss

35,000 generates 120,000 net

(C) operating leverage: 2

(D) financial leverage: 1.63

(E) combined leverage: 3,26

Step-by-step explanation:

`(Contribution \: Margin)/(Sales \: Revenue) = Contribution \: Margin \: Ratio`

`Sales \: Revenue - Variable \: Cost = Contribution \: Margin`

60 pounds sales price = $ 15

60 pound cost: 60 x 0.15 = $ 9

Contribution Margin 6

`(Fixed\:Cost)/(Contribution \:Margin) = Break\: Even\: Point_(units)`

Fixed Cost 90,000

BEP units: 15,000

(B) profit at given level:

sales x margin - fixed cost = net profit

14,000 x 6 - 90,000 = (6,000)

35,000 x 6 - 90,000 = 120,000

(C) operating leverage: change in EBIT / change in sales

income at 21,000 x 6 - 90,000 = 36,000

EBIT change:

120,000/36,000 = 3 + 1/3

Slaes change:

35,000/21,000 = 1 + 2/3

operating leverage:

(3 + 1/3) / (1 + 2/3) = 2

(d) financial leverage

change in net income:

(120,000 - 17,000) / (36,000 - 17,000)

103,000 / 19,000 = 103/19

change in EBIT 3 + 1/3 (already calculate

(103/19) / (3+1/3) = 1.626315789

(E) combined

2 x 1.626315789 = 3,252631578‬