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Break-Even & Profit

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The Last Outpost is a tourist stop in a western resort community. Kerry Yost, the owner of the shop, sells hand-woven blankets for an average price of $30 per blanket. Kerry buys the blankets from weavers at an average cost of $21. In addition, he has selling expenses of $3 per blanket. Kerry rents the building for $300 per month and pays one employee a fixed salary of $500 per month.

1. Determine the number of blankets Kerry must sell to break even.
2. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.
3. Assume that Kerry can produce and sell his own blankets at a total variable cost of $16 per blanket, but that he would need to hire one additional employee at a monthly salary of $600.
a. Determine the number of blankets Kerry must sell to break even.
b. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.

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Solution Preview

Contribution Margin per blanket= Selling Price - (Cost of selling)= 30- (21+ 3)= $6 per blanket

Fixed Costs= 300+ 500= $800

1. Determine the number of blankets Kerry must sell to break even.

Solution: Total Fixed cost/ contribution Margin= 800/6= 133.33 or 134 ...

Solution Summary

All parts of the question are answered in clear, concise calculations with a few words to clarify.

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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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