Break-Even_Analysis

Break-Even Analysis Problem 13 a. The break-even point in bags is 16,000 bags. $80,000 / [$10 – ($.10 * 50)] = $80,000 / $5 = 16,000 bags b. The loss on 12,000 bags is $20,000 and the profit on 25,000 bags is $45,000. Total Variable Costs Fixed Costs Total Costs Total Revenue Operating Income (loss) [12,000 * ($.10 * 50)] (12,000 * $10) $60,000 $80,000 $140,000 $120,000 ($20,000) [25,000 * ($.10 * 50)] (25,000 * $10) $125,000 $80,000 $205,000 $250,000 $45,000 c. The degree of operating leverage at 20,000 bags is 5 and the degree of operating leverage at 25,000 bags is 2.8. DOL = 20,000($10 - $5) / 20,000($10 - $5) - $80,000 = 20,000($5) / 20,000($5) - $80,000 = $100,000 / $100,000 - $80,000 DOL = 5 DOL = 25,000($10 - $5) / 25,000($10 - $5) - $80,000 = 25,000($5) / 25,000($5) - $80,000 = $125,000 / $125,000 - $80,000 DOL = 2.8 The degree of operating leverage changes as the quantity sold increases because the company makes more money to be able to cover costs so it does not need to borrow as much money. The profit made from operations is more as the quantity sold increases. d. The degree of financial leverage at 20,000 bags is 2 and the degree of financial leverage at 25,000 bags is 1.29. Total Variable Costs Fixed Costs Total Costs Total Revenue Operating Income (loss) [20,000 * ($.10 * 50)] (20,000 * $10) $100,000 $80,000 $180,000 $200,000 $20,000 [25,000 * ($.10 * 50)] (25,000 * $10) $125,000 $80,000 $205,000 $250,000 $45,000 DFL = $20,000 / $20,000 - $10,000 = $20,000 / $10,000 = 2 DFL = $45,000 / $45,000 - $10,000 = $45,000 / $35,000 = 1.29 e. The degree of combined leverage at 20,000 bags is 10 and the degree of combined leverage at 25,000 bags is 3.57. DCL = 20,000[$10 – ($.10 * 50)] / 20,000[$10 – ($.10 * 50)] - $80,000 - $10,000 = $100,000 / $10,000 = 10 DCL = 25,000[$10 – ($.10 * 50)] / 25,000[$10 – ($.10 * 50)] - $80,000 - $10,000 = $125,000 / $35,000 = 3.57