Healthy Foods Inc.
lbsbag
Product 45
s
Per
Price $10.00
bag
$85,00
Fixed Costs
0
Variable Costs $0.10Per lbs
$11,00
Annual Interest Exp
0
a. What is the break-even point in bags?
Answer:
Break Even = Fixed Cost
CM
= 85,000
5.5
= 15,455 bags
Contribution Margin (CM) = Price – Variable Cost
= $10 – (45 × $0.10)
= $10 - $4.5
= $5.5
b. Calculate the profit or loss on 12,000 bags and 25,000 bags.
Answer:
For 12,000 bags:
Sales ($10 × 12,000) $120,000
Less: Variable Costs ($0.10 × 45 × 12,000) $54,000
Contribution
Margin $66,000
Less: Fixed Costs $85,000
Net Loss ($19,000)
For 25,000 bags:
Sales ($10 × 25,000) $250,000
Less: Variable Costs ($0.10 × 45 × 25,000) $112,500
Contribution
Margin $137,500
Less: Fixed Costs $85,000
Net Profit $52,500
c. What is the degree of operating leverage at 20,000 bags and
25,000 bags? Why does the degree of operating leverage
change as the quantity sold increases?
Answer:
AT 20,000
DOL = Q (P- VC)
Q (P- VC) – FC
= 20,000 (10- 4.5)
20,000 (10- 4.5) – 85,000
= 110,000
25,000
= 5x
AT 25,000
DOL = Q (P- VC)
Q (P- VC) – FC
= 25,000 (10- 4.5)
25,000 (10- 4.5) – 85,000
= 110,000
25,000
=2.62x
Leverage goes down because we are further away from the break-
even point, thus the firm is operating on a larger profit base and
leverage is reduced
d. If Healthy Foods has an annual interest expense of $11,000,
calculate the degree of financial leverage at 20,000 and 25,000 bags.
Answer:
Number of Bags 20,000 25,000
Revenue $200,000 $250,000
Less: Variable Costs $90,000 $112,500
Contribution Margin $110,000 $137,500
Less: Fixed Costs $85,000 $85,000
Net Profit (Loss) $25,000 $52,500
Interest Expense $11,000 $11,000
DFL 1.79 1.27
e. What is the degree of combined leverage at both sales levels?
Answer:
Number of Bags 20,000 25,000
Price 10 10
VC 4.50 4.50
FC 85,000 85,000
Interest 11,000 11,000
DCL 7.86 3.31