Managment Accounting – Sample 1

Question:

 

Healthy foods inc sells 50-pound bags of grapes to the military for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of the grapes are $.10 per pound.

1. What is the break-even point in bags?
2. Calculate the profit or loss on 20,000 bags and on 25,000 bags?
3. What is the degree of operating leverage at 20,000gs and at 25,000 bags?
4. If a healthy food has an annual interest expense of $10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags.
5. What is the degree of combined leverage at both sales levels?

 

 

Answer

Contribution = Selling price – VC = 10 – .10*50 = $5

 

1. Break even point = Fixed cost / contribution = 80000 / 5 = 16000 bags

 

	20000 bags	25000 bags
Contribution	20000 * 5 = 100000	25000 * 5 = 125000
Less fixed cost	80000	80000
Profit	20000	45000

 

1.    DOL at 20000 = Sales – VC / Sales – VC – FC

= 200000 – 100000 / 20000 = 5

DOL at 25000 = Sales – VC / Sales – VC – FC

= 250000 – 125000 / 45000 = 2.78

 

DOL changes as quantity changes because the contribution increases with quantity but fixed cost remains the same.

 

1. DFL at 20000 = Profit / Profit – Interest

= 20000 / 20000 – 10000 = 2

 

DFL at 25000 = Profit / Profit – Interest

= 45000 / 45000 – 10000 = 1.29

 

e. DCL at 20000 = DOL * DFL   = 5 * 2 = 10

DCL at 25000 = DOL * DFL  = 2.78 * 1.29 = 3.59