# Calculating BEP, operating and financial leverage

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 Preview

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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 ...

#### Solution Summary

Solution describes the steps and formulas for calculating break-even point, operating leverage, financial leverage and combined leverage for Healthy Foods.