Break-even Analysis

# Break-even Analysis - At 25,000 bags DOL =...

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Name: Georgia Moore Date: 03/09/2011 Assignment: Break-Even Analysis 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? 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 or loss on 12,000 bags and on 25,000 bags. Desired sales (in units) = (fixed cost + desired profit)/unit contribution margin 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? DOL = Q(SP -VC)/ [Q(SP - VC) - FC]

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At 20,000 bags DOL = 20,000 (10 - 5)/ [20,000(10 - 5) - 80,000= 5
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Unformatted text preview: At 25,000 bags: DOL = 25,000 (10 -5) /[25,000(10 - 5) - 80,000]= 2.78 Why does the degree of operating leverage change as the quantity sold increases? It changes as output increases because fixed costs are decreasing in relative importance and variable costs are increasing in relative importance as output rises 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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## This note was uploaded on 05/13/2011 for the course FIN 200 taught by Professor Williams during the Spring '08 term at University of Phoenix.

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Break-even Analysis - At 25,000 bags DOL =...

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