RE: Break Even Analysis

A. What is the break-even point in bags?

Formula: FC/P – VC

$80,000/$10-5 (0.10 x 50 lbs = $5.00)

$80,000/$5

Break-Even Point would be $16,000

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

12,000 bags

12,000 x $10 = 120,000

80,000/$5 x 12,000 = $80,000 + $60,000 = $140,000

120,000 – 140,000 = -20,000 loss

25,000 bags

25,000 x $10 = 250,000

80,000/$5 x 25,000= 80,000 + 125,000 = 205,000

250,000 – 205,000 = 45,000 profit C. What is the degree of operating leverage at 20,000 bags and 25,000 bags?

20,000 bags

20,000($0.10 x 50 lbs)/20,000($5.00) – 80,000

100,000/20,000

DOL = 5

25,000 bags

25,000($0.10 x 50 lbs)/25,000($5.00) – 80,000

125,000/45,000

DOL =2.78

Why does the degree of operating leverage change as the quantity sold increase?

The degree of operating leverage gives the company an idea of how much operating level they have at different points of quantity. However, the goal is for the company to be close to the break-even point, which if they are further away from the break-even point then the degree of operating leverage will decline. 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.

20,000 bags

DFL =2

25,000 bags

DFL=1.29

E. What is the degree of combined leverage at both levels?

20,000 bags

DOL =5

DFL =2

Combined would be 5 times 2 which is 10

25,000 bags

DOL =2.78

DFL= 1.29

Combined would be 2.78 times 1.29 which is