12BP_c Healthy Foods Inc. sells 50-poun... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 12BP_c (page 147)

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 grapes are $0.10 per pound.
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?

Short Answer

Expert verified

The operating leverage at 20,000 bags is 5 and at 25,000 bags is 2.78.

The operating leverage changes due to increase in quantity sold because the contribution and EBIT of the company changes when the increase in sales volume.

Step by step solution

Income statement at the sales volume of 20,000 bags and at 25,000 bags

Particulars	20,000 bags	25,000 bags
Sales	$200,000 (20,000 x $10)	$250,000 (25,000 x $10)
Less: variable cost	100,000 (20,000 x $5)	125,000 (25,000 x $5)
Contribution	$100,000	$125,000
Less: Fixed cost	80,000	80,000
EBIT	$20,000	$45,000

Operating leverage at 20,000 bags

$\begin{array}{rcl} Operating leverage & = & \frac{Contribution}{EBIT} \\ = & \frac{$ 100, 000}{$ 20, 000} \\ = & 5 \end{array}$

Operating leverage at 25,000 bags

$\begin{array}{rcl} Operating leverage & = & \frac{Contribution}{EBIT} \\ = & \frac{$ 125, 000}{$ 45, 000} \\ = & 2.78 \end{array}$

Operating leverage decreases because the EBIT of the company increases with high rate in comparison of contribution.

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Lancaster corporation
Sales	\(246,000
Cost of goods sold	122,000
Gross profit	\)124,000
Fixed charges (other than interest)	27,500
Income before interest and taxes	\(96,500
Interest	21,800
Income before taxes	\)74,700
Taxes (35%)	26,145
Income after taxes	$48,555

HARDING COMPANY Income Statement For the year ended December 31, 20X1
Sales (10,500 skates at \(60 each)	\)630,000
Less: variable costs (10,500 tires at \(25)	262,500
Less: fixed cost	200,000
Earnings before interest and taxes (EBIT)	\)167,500
Interest expenses	62,500
Earning before taxes (EBT)	\(105,000
Income tax expenses (30%)	31,500
Earning after taxe (EAT)	\)73,500

Outcome	Probability	Units	Price
A	0.70	225	$20
B	0.10	370	35
C	0.20	510	45

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Short Answer

Step by step solution

Income statement at the sales volume of 20,000 bags and at 25,000 bags

Operating leverage at 20,000 bags

Operating leverage at 25,000 bags

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