Break Even Analysis

Pages: 1 (319 words) Published: November 1, 2010
A.The break-even point in bags of grapes is
\$10 – (50 x \$0.10) = \$10 - \$5 = \$5
BEP = FC/P-VC = \$80,000/\$5 = 16,000 bags
B.Profit or loss for 12,000 and 25,000 bags
a. Sales (\$10 x 12,000) = \$120,000
Less: Variable Costs (\$0.10 x 50 x 12,000) = \$60,000
Contribution Margin = \$60,000
Less: Fixed Costs = \$80,000
Net Loss = \$20,000
b. Sales (\$10 x 25,000) = \$250,000
Less: Variable Costs = (\$0.10 x 50 x 25,000) \$125,000
Contribution Margin = \$125,000
Less: Fixed Costs = \$80,000
Net Loss = \$45,000
C.DOL (20,000) = Q(P-VC)/Q(P-VC) – FC = \$20,000(\$10-\$5)/20,000(\$10-\$5) - \$80,000 = \$20,000(\$5)/\$20,000(\$5) - \$80,000 = \$100,000/\$20,000 = \$5.00x DOL (25,000) = Q(P-VC)/Q(P-VC) – FC = \$25,000(\$10-\$5)/25,000(\$10-\$5) - \$80,000 = \$25,000(\$5)/\$25,000(\$5) - \$80,000 = \$125,000/\$45,000 = \$2.78x Leverage is less due to the higher profit and a decreased need for loans and additional debt; the higher the profit, the lesser the leverage. D.DFL (20,000) EBIT/EBIT – I = \$20,000/\$20,000 - \$10,000 = \$20,000/\$10,000 = \$2.00x DFL (25,000) EBIT/EBIT – I = \$45,000/\$45,000 - \$10,000 = \$45,000/\$35,000 = \$1.29x E.Degree of combined leverage at both sales levels =

DCL (20,000) Q(P-VC)/Q(P-VC) – FC – I = 20,000(\$10 - \$5)/20,000(\$10 - \$5) - \$80,000 - \$10,000 = 20,000(\$5)/20,000(\$5) - \$90,000 = \$100,000/\$10,000 = \$10.00x DCL (25,000) Q(P-VC)/Q(P-VC) – FC – I = 25,000(\$10 - \$5)/25,000(\$10 - \$5) - \$80,000 - \$10,000 = 25,000(\$5)/25,000(\$5) - \$90,000 = \$125,000/\$35,000 = \$3.57x