# Break-Point Analysis

Submitted by: Submitted by

Views: 1558

Words: 460

Pages: 2

Category: Science and Technology

Date Submitted: 05/27/2010 10:59 PM

Report This Essay

Break-Even Analysis

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?

Unit Contribution Margin UCM=Price-Variable Cost

=\$10-50 ×\$0.10

=\$10-\$5

=\$5

BEP in bags= Fixed CostsUCM

= \$80,000\$5

=16,000 bags

b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.

For 12,000 bags:

Sales (\$10 × 12,000) \$120,000

Less: Variable Costs (\$0.10 × 50 × 12,000) \$60,000

Contribution Margin \$60,000

Less: Fixed Costs \$80,000

Net Loss \$20,000

For 25,000 bags:

Sales (\$10 × 25,000) \$250,000

Less: Variable Costs (\$0.10 × 50 × 25,000) \$125,000

Contribution Margin \$125,000

Less: Fixed Costs \$80,000

Net Profit \$45,000

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?

DOL20,000=QP-VCQP-VC-FC= 20,000\$10-\$520,000\$10-\$5-\$80,000=20,000\$520,000\$5-\$80,000= \$100,000\$20,000=5.0×

DOL25,000=Q(P-VC)QP-VC-FC= 25,000(\$10-\$5)25,000\$10-\$5-\$80,000= 25,000(\$5)25,000\$5-\$80,000=\$125,000\$45,000=2.78×

Leverage goes down because we are further away from the break-even point, thus the firm is operating on a larger profit base and leverage is reduced.

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.

a. First determine the profit or loss (EBIT) at 20,000 bags. As indicated in part b, the profit (EBIT) at 25,000 bags is \$45,000:

| 20,000 bags |

Sales @ \$10 per box | \$200,000 |

Less: Variable Costs (\$5) | (100,000) |

Less: Fixed Costs | (80,000) |

Profit or Loss | \$20,000 |

DFL20,000=EBITEBIT-I=\$20,000\$20,000-\$10,000=\$20,000\$10,000=2.0×

DFL25,000=EBITEBIT-I=\$45,000\$45,000-\$10,000=\$45,000\$35,000=1.29×

e. What is the degree of...

### Related Essays

Break Even Point Analysis
enterprise or product is the break-even analysis. The break-even point is the point at which revenue is exactly equal to costs. At this point, no profit is made and
Break Even Analysis
terms, it is simply the point where total expenses equal to net sales revenue. A key component of break-even analysis is the contribution margin, which
Break-Even Analysis
analysis can be used as a tool that drives costs and affects management decisions in healthcare. The break-even analysis
Break Even Analysis
the DRG analysis, the organization will be able to arise with strategies that minimizes costs and operate at levels of service above the break-even point so that