Calculating BEP, operating and financial leverage
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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?
b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.
c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags? Why does the degree of operating leverage change as the quantity sold
increases?
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.
e. What is the degree of combined leverage at both sales levels?
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Solution Summary
Solution describes the steps and formulas for calculating break-even point, operating leverage, financial leverage and combined leverage for Healthy Foods.
Solution Preview
Please refer attached file for better clarity of formulas. Work done with the help of equation writer may not print here.
Solution:
a. What is the break-even point in bags?
Fixed Costs=80000
Variable Costs per bag=5
Selling Price per bag=10
Break even sales=Fixed Costs/(Selling Price-Variable Cost)=16000 bags
b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.
Case- 12000 bags
Revenue generated from sale of 12000 bags=120000
Fixed Costs=80000
Variable Costs per bag=5
Total costs for producing 12000 bags=Fixed costs+Qty*variable ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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