Break-Even Analysis

Healthy Foods, Inc. sales information.

Bags size: 50 lbs. Fixed cost of OPS: $80,000.

Bags price: $10. Variable cost: $0.10 per lb.

What is the break-even point

BE=(Fixed Cost)/-(Contribution Margin@(price-variable cost))

BE=80,000/(10-(50*0.10) )>BE=80,000/(10-5)>BE=80,000/5>BE=16,000

Break-even point is 16,000 bags or $160,000 in sales (16,000*10).

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

1, on 12,000 bags

12,000 bags * $10= $120,000 sales (less than $160,000)

12,000 bags * 50 lbs * $0.10= $60,000 variable cost

sales ??“ variable cost= totals cost so, $120,000 – $60,000= 60,000

$80,000 + $60,000= $140,000

$120,000 – $140,000 = -$20,000

Since at this point the sales are lower than the BE amount, we can see that the sale will result in loss. After this calculation we can determine that the loss is of $20,000.

2, on 25,000 bags

25,000 bags * $10= $250,000 sales (more than $160,000)

25,000 bags * 50 lbs * $0.10= $125,000 variable cost

sales ??“ variable cost= total cost so, $250,000 – $125,000= $125,000

$80,000 + $125,000= $205,000

$250,000 – $205,000= $45,000

Since at this point the sales are higher than the BE amount, we can see that the sale will result in profit. After this calculation we can determine that the profit is of $45,000.

What is the degree of operating leverage at 20,000 bags and at 25,000 bags

Why does the DOL change as the quantity sold increases

1, on 20,000 bags

DOL= (Q(P-VC))/(Q(P-VC)-FV)>DOL= (20,000[10-(0.10*50)])/(20,000[10-(0.10*50)]-80,000)

DOL=100,000/(100,000-80,000)>DOL= 100,000/20,000>DOL=5 times

2, on 25,000 bags

DOL= 25,000[10-(0.10*50)]/(25,000[10-(0.10*50)]-80,000)>DOL=125,000/(125,000-80,000)

DOL=125,000/45,000>DOL=2.78 times

As explained by Block, Hirt, and Danielsen (2009) ???[there is a] substantial increase income as volume expands??? (p. 128). Additionally, as production cost decreases with the increase of sales, the company??™s borrowed money will decrease. Thus, the profit and sales will move along and when they both increase the DOL decreases.

Calculate the degree of financial leverage at both 20,000 and 25,000 bags, when the annual interest expense is $10,000.

1, on 20,000 bags

EBIT= (20,000 * 10) ??“ (20,000 * 5) ??“ 80,000

EBIT= 200,000 ??“ 100,000 ??“ 80,000

EBIT= 20,000.

DFL=EBIT/(EBIT-I)>DFL=20,000/(20,000-10,000)>DFL=20,000/10,000>DFL=2 times

2, on 25,000 bags

EBIT= (25,000 * 10) ??“ (25,000 * 5) ??“ 80,000

EBIT= 250,000 ??“ 125,000 ??“ 80,000

EBIT= 45,000

DFL=45,000/(45,000-10,000)>DFL= 45,000/35,000>DFL=1.29 times

What is the degree of combined leverage at both sales levels

1, on 20,000 bags

DCL=Q(P-VC)/(Q(P-VC)-FV-I)>DCL= 20,000(10-5)/(20,000(10-5)-80,000-10,000)

DCL=100,000/10,000>DCL=10 times

2, on 25,000 bags

DCL=25,000(10-5)/(25,000(10-5)-80,000-10,000)>DCL= 125,000/(125,000-80,000-10,000)

DCL= 125,000/35,000>DCL=3.75 times

Reference

Block, B.B., Hirt, G.A., & Danielsen, B.R. (2009). Foundations of financial management (13th ed.). New York: McGraw Hill/Irwin.