Healthy Foods Inc. sells 40-pound bags of grapes to the military for $15 a bag.

Question

Healthy Foods Inc. sells 40-pound bags of grapes to the military for $15 a bag. The foxed costs of this operation are $105,000, while the variable costs of grapes are $.20 per pound. a. What is the break-even point in bags? Break-even point bags b. Calculate the profit or loss (EBIT) on 14,000 bags and on 40,000 bags. Bags ProfiuLoss Amount 14,000 40,000 G. What is the degree of operating leverage at 28,000 bags and at 40,000 bags? (Round your answers to 2 decimal places.) Bags Degree of Operating 28,000 0,000 d. If Healthy Foods has an annual interest expense of $11,000, calculate the degree of financial leverage at both 28,000 and 40,000 bags. (Round your answers to 2 decimal places.) Degree of Financial Bags Leve 28.000 40,000 e. What is the degree of combined leverage at both 28,000 and 40,000 bags? (Round your answers to 2 decimal places)

Explanation / Answer

Part A:

Break Even = Fixed Cost/ (Price - Variable Cost)

Break Even = 105,000/ (15 - (0.20 * 40))

Break Even = 15,000 Bags

Part B:

EBIT on 14,000 bags = Number of Units (Q) * (Price - Variable Cost) - Fixed Cost

EBIT on 14,000 bags = 14,000 * (15 - (0.20 * 40) - 105,000

EBIT on 14,000 bags = -7,000

EBIT on 40,000 bags = Number of Units (Q) * (Price - Variable Cost) - Fixed Cost

EBIT on 40,000 bags = 40,000 * (15 - (0.20 * 40) - 105,000

EBIT on 40,000 bags = 175,000

Part C:

DOL of 28,000 bags = Q * (P VC) / (Q * (P VC) FC)

DOL of 28,000 bags = 28,000 * (15 (0.20 * 40)) / (28,000 * (15 (0.20 * 40)) 105,000)

DOL of 28,000 bags = 196,000 / 91,000

DOL of 28,000 bags = 2.15

DOL of 40,000 bags = Q * (P VC) / (Q * (P VC) FC)

DOL of 40,000 bags = 40,000 * (15 (0.20 * 40)) / (40,000 * (15 (0.20 * 40)) 105,000)

DOL of 40,000 bags = 280,000 / 175,000

DOL of 40,000 bags = 1.60

Part D:

EBIT of 28,000 bags = Q * (P VC) FC

EBIT of 28,000 bags = 28,000 * (15 (0.20 * 40)) 105,000

EBIT of 28,000 bags = 91,000

DFL 28,000 bags = EBIT / (EBIT I)

DFL 28,000 bags = 91,000/ (91,000 11,000)

DFL 28,000 bags = 1.14

EBIT of 40,000 bags = Q * (P VC) FC

EBIT of 40,000 bags = 40,000 * (15 (0.20 * 40)) 105,000

EBIT of 40,000 bags = 175,000

DFL 40,000 bags = EBIT / (EBIT I)

DFL 40,000 bags = 175,000/ (175,000 11,000)

DFL 40,000 bags = 1.07

Part E:

Degree of Combined leverage of 28,000 bags = DOL * DFL of 28,000 bags

Degree of Combined leverage of 28,000 bags = 2.15 * 1.14

Degree of Combined leverage of 28,000 bags = 2.45

Degree of Combined leverage of 40,000 bags = DOL * DFL of 40,000 bags

Degree of Combined leverage of 40,000 bags = 1.60 * 1.07

Degree of Combined leverage of 40,000 bags = 1.71

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