United Snack Company sells 60-pound bags of peanuts to university dormitories fo

Question

United Snack Company sells 60-pound bags of peanuts to university dormitories for $52 a bag. The fixed costs of this operation are $474,280, while the variable costs of peanuts are $.31 per pound.

  

What is the break-even point in bags? (Round your answer to the nearest whole number.)

  

   

Calculate the profit or loss (EBIT) on 7,000 bags and on 20,000 bags. (Input all amounts as positive values. Round your answers to the nearest whole number.)

  

   

What is the degree of operating leverage at 19,000 bags and at 24,000 bags? (Round your answers to 2 decimal places.)

   

  

If United Snack Company has an annual interest expense of $31,000, calculate the degree of financial leverage at both 19,000 and 24,000 bags. (Round your answers to 2 decimal places.)

  

   

What is the degree of combined leverage at both a sales level of 19,000 bags and 24,000 bags? (Round your answers to 2 decimal places.)

   

a.

What is the break-even point in bags? (Round your answer to the nearest whole number.)

Explanation / Answer

a. Variable cost per bag = 60 x 0.31 = $ 18.6

Contribution margin per bag = Selling price per bag - Variable cost per bag = $ ( 52 - 18.6) = $ 33.4

Breakeven point = Fixed costs / Contribution margin per bag = 474,280 / 33.4 = 14,200 bags

b. Computation of EBIT:

c. Degree of Operating leverage:

Operating leverage = Contribution margin / EBIT

d. Degree of financial leverage: EBIT / EBT

e. Degree of combined leverage : DOL X DFL

7,000 bags 20,000 bags $ $ Sales revenue 364,000 1,040,000 Variable costs 130,200 372,000 Contribution margin 233,800 668,000 Fixed costs 474,280 474,280 EBIT (240,480) 193,720

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