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Chapter 2: 13BP_d (page 148)

United Snack Company sells 50-pound bags of peanuts to university dormitories for \(20 a bag. The fixed costs of this operation are \)176,250, while the variable costs of peanuts are \(0.15 per pound.

d. If United Snack Company has an annual interest expense of \)15,000, calculate

the degree of financial leverage at both 19,000 and 24,000 bags.

Short Answer

Expert verified

The financial leverage at 19,000 bags is 1.32 and at 24,000 bags is 1.14.

Step by step solution

01

Income statement at the sales volume of 19,000 bags and at 24,000 bags

Particulars

19,000 bags

24,000 bags

Sales

$380,000 (19,000 x $20)

$480,000 (24,000 x $20)

Less: variable cost

142,500 (19,000 x $7.50)

180,000 (24,000 x $7.5)

Contribution

$237,500

$300,000

Less: Fixed cost

176,250

176,250

EBIT

61,250

123,750

Less: Interest

15,000

15,000

EBT

$46,250

$108,750

02

Financial leverage at 19,000 bags

Financialleverage=EBITEBT=$61,250$46,250=1.32

03

Financial leverage at 24,000 bags

Financialleverage=EBITEBT=$123,750$108,750=1.14

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