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FIN 200 Wk 4 CheckPoint Break-Even

# FIN 200 Wk 4 CheckPoint Break-Even - DOL =...

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A. Break-even point = Fixed cost/unit contribution margin Unit contribution margin = selling price per unit - variable cost per unit = \$10 - (50 x 0.10) = 10 - 5 = \$5 Breakeven point = 80,000/5 = 16,000 bags B. Calculate the profit of loss on 12,000 bags and on 25,000 bags. Desired sales (in units) = (fixed cost + desired profit)/unit contribution margin

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12,000 = (80,000 + desired profit)/5 80,000 + desired profit = 60,000 Desired profit/loss = 60,000 - 80,000 Net loss = 20,000 25,000 = (80,000 + desired profit)/5 125,000 = 80,000 + desired profit Desired profit = 125,000 - 80,000 = 45,000 C. What is the degree of operating leverage at 20,000 bags and at 25,000 bags? What is the degree of operating leverage change as the quantity sold increases? DOL = Q(SP -VC)/ [Q(SP - VC) - FC] At 20,000 bags DOL = 20,000 (10 - 5)/ [20,000(10 - 5) - 80,000 = 5 At 25,000 bags:
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Unformatted text preview: DOL = 25,000 (10 -5) /[25,000(10 - 5) - 80,000] = 2.78 This means that leverage will go down because it results in being further away from the break-even point, therefore the firm is operating on a larger profit base and leverage is reduced. 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 Degree of financial leverage = EBIT/ (EBIT - I) At 20,000 bags determine the profit: 20,000 = (80,000 + profit)/ 5 Profit/EBIT = 100,000 - 80,000 = 20,000 DFL = 20,000/ (20,000 - 10,000) = 2 At 25,000 bags we already have calculated Profit/EBIT which is 45,000 DFL = 45,000/(45,000 - 10,000) = 1.29 E. What is the degree of combined leverage at both sales levels. Degree of combined leverage = DOL x DFL At 20,000 bags: DCL = 5 x 2 = 10 At 25,000 bags: DCL = 2.78 x 1.29 = 3.57...
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