Question

Healthy Foods Incorporated sells 50-pound bags of grapes to the military for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of grapes are $0.10 per pound. a. What is the break-even point in bags? b. Calculate the profit or loss (EBIT) on 13,000 bags. c. Calculate the profit or loss (EBIT) on 35,000 bags. d. What is the degree of operating leverage at 35,000 bags?

Answer 1

The break-even point for Healthy Foods Incorporated is 16,000 bags. The company would experience a loss of $15,000 on 13,000 bags and a profit of $95,000 on 35,000 bags. The degree of operating leverage at 35,000 bags is approximately 1.84.

Step-by-step explanation:

To answer the question regarding the break-even point for Healthy Foods Incorporated's operation of selling 50-pound bags of grapes, we first need to calculate the contribution margin per bag. The selling price per bag is $10 and the variable cost is $0.10 per pound, which is $5 per bag (50 pounds × $0.10). The contribution margin per bag is therefore $5 ($10 - $5). The break-even point in bags is then the fixed costs divided by the contribution margin per bag, which is $80,000 / $5 = 16,000 bags.

For part b, to calculate the profit or loss (EBIT) on 13,000 bags, we multiply the number of bags by the contribution margin and subtract the fixed costs: (13,000 × $5) - $80,000, which is $65,000 - $80,000, resulting in a loss of $15,000.

For part c, the profit or loss (EBIT) on 35,000 bags is calculated in a similar way: (35,000 × $5) - $80,000, which is $175,000 - $80,000, resulting in a profit of $95,000.

Regarding part d, the degree of operating leverage at 35,000 bags is calculated by dividing the contribution margin by the EBIT: Total Contribution Margin / EBIT. The total contribution margin at 35,000 bags is (35,000 × $5) = $175,000. The operating leverage is then $175,000 / $95,000 which is approximately 1.84.