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 $85,000, 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 15,000 bags and on 30,000 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 30,000 bags? (Round your answers to 2 decimal places.)

If Healthy Foods has an annual interest expense of $16,000, calculate the degree of financial leverage at both 22,000 and 30,000 bags. (Round your answers to 2 decimal places.)

What is the degree of combined leverage at both 22,000 and 30,000 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 $85,000, while the variable costs of grapes are $.10 per pound.

Explanation / Answer

a)selling price per bag = $ 10

Variable cost per bag = 50 *.10 = $ 5 per bag

contribution per bag= 10 - 5 =$ 5

BEP =Fixed cost /Contribution per bag

                = 85000 / 5

               = 17000 bags

b)EBIT = contribution -Fixed cost

1: EBIT = (15000 * 5 ) - 85000

            = 75000 - 85000

           = - 10000 (loss)

2)EBIT = (30000 * 5 ) - 85000

          = 150000 -85000

         = 65000 (profit)

c)Degree of operating leverage =contribution /net income

1)Contribution = 5 * 22000 = 110000

EBIT = 110000 - 85000 = 25000

DOL = 110000 /25000 = 1.47

2)DOL = 150000 / 65000 = 2.31

D)Degree of financial leverage = EBIT /(EBIT -Interest)

1) DFL =   25000 / (25000- 16000)

              = 25000/ 9000

               = 2.78

2)DFL = 65000 / (65000-16000)

          = 65000 / 49000

          = 1.33

e)Degree of combined leverage = Degree of operting leverage * Degree of financial leverage

1) DCL = 1.47 * 2.78 = 4.09

2)DCL = 2.31 * 1.33 = 3.07

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