Healthy Foods Inc. sells 50-pound bags of grapes to the military for $20 a bag.

Question

Healthy Foods Inc. sells 50-pound bags of grapes to the military for $20 a bag. The fixed costs of this operation are $105,000, while the variable costs of grapes are $.25 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 25,000 bags. (Input all amounts as positive values. Round your answers to the nearest whole number.)

What is the degree of operating leverage at 23,000 bags and at 25,000 bags? (Round your answers to 2 decimal places.)

If Healthy Foods has an annual interest expense of $7,000, calculate the degree of financial leverage at both 23,000 and 25,000 bags. (Round your answers to 2 decimal places.)

What is the degree of combined leverage at both 23,000 and 25,000 bags? (Round your answers to 2 decimal places.)

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

Explanation / Answer

Let quantity sold=x

a)

For break even

Total contribution=Fixed cost

X*(20-50*0.25)=105000

X=105000/(20-50*0.25)= 14000 bag

b)

EBIT (15000 bag) =15000*(20-50*0.25)-105000=$7500

EBIT (25000 bag) =25000*(20-50*0.25)-105000=$82500

c)

DOL=Total Contribution/EBIT

DOL(23000 bag) =(23000*(20-50*0.25))/( 23000*(20-50*0.25)-105000)= 2.555555556

DOL(25000 bag) =(25000*(20-50*0.25))/( 25000*(20-50*0.25)-105000)= 2.272727273

d)

DFL=EBIT/(EBIT-Total Interest)

DFL(23000 bag) =(23000*(20-50*0.25)-105000)/(23000*(20-50*0.25)-105000-7000)= 1.115702479

DFL(25000 bag) =(25000*(20-50*0.25)-105000)/(25000*(20-50*0.25)-105000-7000)= 1.092715232

e)

Degree of combined leverage=DFL*DOL

Degree of combined leverage(23000 bags)= DOL(23000 bag)* DFL(23000 bag)=2.5555*1.1157=2.85117135

Degree of combined leverage(25000 bags)= DOL(25000 bag)* DFL(25000 bag)=2.272727*1.09272=2.483454247

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.