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# CVP and leverage

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United Snack Company sells 50 pound bags of peanuts to university dormitories for \$10 a bag. The fixed costs of this operation are 80,000 while the variable cost of peanuts 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 the United Snack Company 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?

#### Solution Preview

See attached file for formulas and calculations in proper format.

United snack company sells 50 pound bags of peanuts to university dormitories for \$10 a bag
the fixed costs of this operation are 80 000 while the variable cost of
peanuts are \$.10 per round.

a. What is the break-even point in bags?
Fixed Costs=80000
Variable Costs per bag=0.1*50=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 ...

#### Solution Summary

Solution describes the steps to calculate BEP, profit, degree of operating leverage, degree of finance leverage and degree of combined leverage at given levels of output.

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