Break Even Analysis

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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
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