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United Snack Company sells 50-pound bags of peanuts to university dormitories for
a. What is the break-even point in bags?
b. Calculate the profit or loss on 7,000 bags and on 20,000 bags.
c. What is the degree of operating leverage at 19,000 bags and at 24,000 bags? Why does the degree of operating leverage change as the quantity sold increases?
d. If United Snack Company has an annual interest expense of
e. What is the degree of combined leverage at both sales levels?
a.
To calculate: The BEP of the bags for United Snack Company.
Introduction:
Break-even point (BEP):
It is a point of sale at which a company is in a no profit and no loss situation. The value of BEP is derived by dividing total fixed cost by the difference of revenue per unit and variable cost per unit.
Answer to Problem 13P
The BEP of United Snack company is 14,100 bags.
Explanation of Solution
Computation of the BEP of United Snack Company:
b.
To calculate: The profit or loss for United Snack Company at 7,000 bags as well as 20,000 bags.
Introduction:
Profit or Loss:
It refers to the gain or loss arising from the commercial transactions during a specified period of time and is used to assess the company’s financial performance.
Answer to Problem 13P
Calculation of the profit and loss on 7,000 bags and 20,000 bags for United Snack Company:
Explanation of Solution
The formulae used for the computation of profit or loss at 7,000 as well as 20,000 bags:
Working Notes:
Computation of variable cost per unit:
c.
To calculate: The DOL for both 19,000 and 24,000 bags of United Snack Company and also explain the reason behind the change of DOL with the increase in quantity sold.
Introduction:
Degree of Operating Leverage (DOL):
It is a multiple measurement ratio which determines the quantity of change in operating income of the company with the change in sales value.
Answer to Problem 13P
DOL of United Snack Company for 19,000 bags is 3.88 times and for 24,000 bags is 2.42 times.
The reason behind this change of DOL is that the leverage has gone down and is far away from BEP. Hence, we can say that the leverage has decreased and the organisation is operating on a greater profit base.
Explanation of Solution
Calculation of DOL for 19,000 bags:
Calculation of DOL for 24,000 bags:
d.
To calculate: The DFL of United Snack Company.
Introduction:
Degree of financial leverage (DFL):
It is a multiple measurement ratio which determines the quantity of change in operating income of the company with the change in sales value.
Answer to Problem 13P
The DFL of United Snack Company for 19,000 bags is 1.32 times and for 24,000 bags is 1.53 units.
Explanation of Solution
Calculation of DFL for 19,000 bags:
Calculation of DFL for 24,000 bags:
Working Notes:
Calculation of EBIT of 19,000 bags:
Calculation of EBIT of 24,000 bags:
e.
To calculate: The DCL of United Snack Company.
Introduction:
Degree of combined leverage (DCL):
It is a multiple measurement ratio which determines the quantity of change in operating income of the company with the change in sales value.
Answer to Problem 13P
The DCL of United Snack Company of 19,000 bags is 5.14 times and for 24,000 bags is 2.76 times.
Explanation of Solution
Computation of DCL of 19,000 bags:
Computation of DCL of 24,000 bags:
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Chapter 5 Solutions
Foundations of Financial Management
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