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

Question

Organic Foods Inc. sells 50-pound bags of grapes to the public schools for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of grapes are $.10 per pound.
         a.      What is the break-even point in bags?
         b.      Calculate the profit or loss on 12,000 bags and on 25,000 bags.
         c.      What is the degree of operating leverage at 20,000 bags?
         d.      If Oganic Foods has an annual interest expense of $10,000, calculate the degree of financial leverage at 20,000 bags.
         e.      What is the degree of combined leverage at both sales levels?

Damon · Answer

number of bags = b
number of pounds = 50 b

costs = 80,000 + .10 * 50 b
revenue = 10 b

a) revenue = cost
10 b = 80,000 + 5 b
5 b = 80,000
b =16,000 bags to break even

b) profit = revenue - cost
p = 10(12,000) -80,000 - 5(12,000)
p = -20,000
a loss of course because < 16,000
etc