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Solve: Operating, Financial and Combined Leverage

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Moe & Chris' Delicious Burgers, Inc., sells food to University Cafeterias for $15 a box. The fixed costs of this operation are $80,000, while the variable cost per box is $10.

Questions:
a. What is the break-even point in boxes?
b. Calculate the profit or loss on 15,000 boxes and on 30,000 boxes.
c. What is the degree of operating leverage at 20,000 boxes and at 30,000 boxes? Why does the degree of operating leverage change as the quantity sold increases?
d. If the firm has an annual interest expense of $10,000, calculate the degree of financial leverage at both 20,000 and 30,000 boxes.
e. What is the degree of combined leverage at both sales levels?

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Solution Summary

In 360 words, this solution provides a detailed, step by step response explaining how to calculate operating, financing and combined leverage.

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a. What is the break-even point in boxes?

The variable cost is $10, fixed costs are 80,000 and the selling price is $15. The contribution margin is $5 ( selling price - variable cost). The breakeven point is where there is no profit or loss. Each unit sold gives a $5 is profit. We need to find the number of units which would give $80,000 in profit. This would go towards meeting the fixed costs and there would be no profit no loss. The number of units would be 80,000/5 = 16,000. Break even sales = 16,000X15=$240,000
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