Question

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 perpound.

A. WHat is the break-even point in bags?
B. Calculate the profit or loss on 7000 bags and on 20,000 bags.
C. what is the degree of operating leverage at 19,000 bags and at 24,000? Why does the degree of operating leverage change as the quantity sold increases?
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.
E. What is the degree of combined leverage at both sales levels?

Answer 1

The United Snack Company's break-even point calculation, profit or loss at different sales levels, and degrees of leverage are crucial financial metrics that help assess the financial performance and risk within the company, particularly in the context of its sales to university dormitories.

Step-by-step explanation:

The United Snack Company sells 50-pound bags of peanuts to university dormitories at a fixed cost of operation of $176,250 and variable costs of $0.15 per pound. To calculate the break-even point in bags, the fixed costs must be divided by the contribution margin per bag (selling price per bag minus variable costs per bag). The profit or loss for any number of bags can be found by taking the total revenue (number of bags sold multiplied by the selling price per bag) and subtracting the total costs (fixed costs plus total variable costs for the number of bags).

Degree of operating leverage reflects how a change in sales volume will affect operating income due to fixed expenses. It increases as the quantity sold increases because fixed costs are spread over more units. The degree of financial leverage involves the fixed financial costs like interest, which reflects the percentage change in earnings per share for a one percent change in operating income. Lastly, the degree of combined leverage is the product of operating and financial leverage, showing the effect on EPS for changes in sales.