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week 4 checkpoint - Healthy Foods Inc sells 50-pound bags...

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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? Unit Contribution Margin (UCM) = Price – Variable Cost = $10 – (50 × $0.10) = $10 - $5 = $5 BEP in bags = Fixed Costs UCM = $80,000 $5 = 16,000 bags b. Calculate the profit or loss on 12,000 bags and on 25,000 bags. For 12,000 bags: Sales ($10 × 12,000) $120,000 Less: Variable Costs ($0.10 × 50 × 12,000) $60,000 Contribution Margin $60,000 Less: Fixed Costs $80,000 Net Loss $20,000 For 25,000 bags: Sales ($10 × 25,000) $250,000 Less: Variable Costs ($0.10 × 50 × 25,000) $125,000 Contribution Margin $125,000 Less: Fixed Costs $80,000 Net Profit $45,000 c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases?
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( 29 ( 29 ( 29 ( 29 × = = - = - - - = - - - = 0 . 5 000 , 20 $ 000 , 100 $ 000 , 80 $ 5 $ 000 , 20 5 $ 000 , 20 000 , 80 $ ) 5 $ 10 ($ 000 , 20 ) 5 $ 10 ($ 000 , 20 000 , 20 FC VC) (P Q VC P Q DOL ( 29 ( 29 ( 29 ( 29 × = = - = - - - = - - - = 78 . 2 000 , 45 $ 000 , 125 $ 000 , 80 $ 5 $ 000 , 25 5 $ 000 , 25 000 , 80 $ ) 5 $ 10 ($ 000 , 25 ) 5 $ 10 ($ 000 , 25 000 , 25 FC VC) (P Q VC P Q DOL Leverage goes down because we are further away from the break-even point, thus the firm is operating on a larger profit
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