United Snack Company sells 50-pound bags of peanuts to university dormitories fo
ID: 2814908 • Letter: U
Question
United Snack Company sells 50-pound bags of peanuts to university dormitories for $14 a bag The fixed costs of this operation are $100,000, while the variable costs of peanuts are 50.12 per pound. a. What is the break-even point in bags? b. Calculate the profit or loss (EBIT) on 10,000 bags and on 23.000 bags c. What is the degree of operating leverage at 18,00 bags and at 23.000 bags? (Round your answers to 2 decimal places.) d. If United Snack Company has an annual interest expense of $12 000, calculate the degree of financial leverage at both 18,000 and 23,000 bags. (Round your answers to 2 decimal places.) e. What is the degree of combined leverage at both a sales level of 18,000 bags and 23,000 bags? (Round your answers to 2 decimal places.)Explanation / Answer
a. Break Even Point = Fixed Cost / Contribution per Bag
Break Even Point = Fixed Cost / Selling Price - Variable Cost
Break Even Point = $100000 / $14 - $0.12 * 50
Break Even Point = $100000 / $14 - $6
Break Even Point = 12500 Bags
b1. Profit on 10000 Bags = Contribution * No. of bags - Fixed Cost
Profit on 10000 Bags = $8 * 10000 - $100000
Profit on 10000 Bags = - $20000 or Loss of $20000
b2. Profit on 23000 Bags = Contribution * No. of bags - Fixed Cost
Profit on 23000 Bags = $184000 - $100000
Profit on 23000 Bags = $84000
c1. Degree of Operating Leverage at 18000 Bags
Degree of Operating Leverage = Contribution / Net Income = 18000 * $8 / $44000
Degree of Operating Leverage = Contribution / Net Income = $144000 / $44000
Degree of Operating Leverage = 3.27
c2. Degree of Operating Leverage at 23000 Bags
Degree of Operating Leverage = Contribution / Net Income = 23000 * $8 / $84000
Degree of Operating Leverage = Contribution / Net Income = $184000 / $84000
Degree of Operating Leverage = 2.19
d1. Degree of Financial Leverage at 18000 Bags
Degree of Financial Leverage = EBIT / EBIT - Interest
Degree of Financial Leverage = $44000 / $32000
Degree of Financial Leverage = 1.38
d2. Degree of Financial Leverage at 23000 Bags
Degree of Financial Leverage = EBIT / EBIT - Interest
Degree of Financial Leverage = $84000 / $72000
Degree of Financial Leverage = 1.17
e1. Degree of Combined Leverage at 18000 Bags
Degree of Combined Leverage = Contribution / EBIT - Interest
Degree of Combined Leverage = $144000 / 32000
Degree of Combined Leverage = 4.50
e2. Degree of Combined Leverage at 23000 Bags
Degree of Combined Leverage = Contribution / EBIT - Interest
Degree of Combined Leverage = $184000 / 72000
Degree of Combined Leverage = 2.56
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