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Submitted by to the category Science and Technology on 05/27/2010 10:59 PM

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...

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