Question

13. Healthy Foods, Inc. sells 50-pound bags of grapes to the military for $10 a bag.
The fixed costs of this operation are $80,000, while the variable costs of the
Grapes are $.10 per pound.


a. What is the break-even point in bags?

$80,000 = $80,000 = 80,808 units
$10.00 - $0.10 $9.90


b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.

12,000 Bags 25,000 Bags
Sales x price per unit 120,000 250,000
Less: Fixed costs 80,000 80,000
Less: Variable cost x per unit 8089 8089
Profit (Loss) 31,911 161,911

Work for 12,000 Bags Work for 25,000 Bags
12,000 x 10= 120,000 25,000 x 10 = 250,000
120,000-80,000 = 40,000 250,000- 80,000 = 170,000
80,808 x .10 = 8089 80,808 x .10 = 8089
40,000-8089= 31,911 170,000 -8089 = 161,911




c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags?

20,000 bags DOL = 4.6 25,000 bags DOL = 5.0

Why does the degree of operating leverage change as the quantity sold
Increases?

20,000 + 80,808= 100,808 25,000 + 80,808 = 105,808
100,808 -80,000 = 20,808 105, 808 -80,000 = 25,808


d. If Healthy Foods has an annual interest expense of $10,000, calculate the
degree of financial leverage at both 20,000 and 25,000 bags.

20,000 bags x $10 = 200,000 - $10,000 = 190,000 – 80,000 = 110,000
25,000 bags x $10 = 250,000 - $10,000 = 240,000 – 80,000 = 160,000

e. What is the degree of combined leverage at both sales levels?
DCL = % Change in EPS
% Change in Sales