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week 4 checkpoint

# week 4 checkpoint - variable cost – Fixed Cost DOL(20,000...

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1 WEEK 4 CHECKPOINT SANDY EDWARDS FIN/200 FEBRUARY 3, 2012 JAMES BOXMA

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2 WEEK 4 CHECKPOINT 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 Break-even point= 80000/ (10 - \$0.10 x 50) =16000 bags b) Calculate the profit or loss on 12,000 bags and on 25,000 bags? Take into consideration the 12,000 bags. Total revenue = 12,000 * 10 = 120,000 Total cost = 80,000 + 0.1 * 50 * 12,000 = 80,000 + 60,000 =140,000 Total loss/profit = 120,000-140,000 = (- 20,000) Total Loss =20,000 Now consider the 25,000 bags. Total revenue = 25,000 * 10 = 250,000 Total cost = 80,000 + 0.1 * 50 * 25,000 = 80,000 + 125,000 = 205,000 Total Profit = 250,000 – 205,000 = 45,000
3 c) What is the degree of operating leverage at 20,000 bags and at 25,000 bags? DOL (20,000)= [Quantity x (selling price – variable cost)]/[Quantity x (selling price –

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Unformatted text preview: variable cost) – Fixed Cost] DOL (20,000) = 20,000 (10 – 5)/[20,000(10-5) – 80,000] = 5 times DOL (25,000) = 25,000 (10 – 5)/{25,000(10-5) – 80,000] = 2.78 times Why does the degree of operating leverage change as the quantity sold increases? I have to say that when the quantity sold increases this will create the DOL to decrease because the company is actually operating to making a larger profit. d) If healthy food has an annual interest expense of \$10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags. DFL (20,000) = EBIT / (EBIT – interest) DFL = 20,000 / (20,000 -10,000) = 2 times DFL (25,000) = EBIT / (EBIT – interest) DFL (25,000) = \$45,000 / (\$45,000- \$10,000) =1.29 times e) What is the degree of combined leverage at both sales levels? DCL = DOL x DFL DCL (20,000) = 5x2 = 10 times DCL (25,000) = 2.78 x 1.29 4 =3.57 Times...
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