Chapter 2: 12BP_e (page 147)

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 grapes are $0.10 per pound.
e. What is the degree of combined leverage at both sales levels?

Short Answer

Expert verified

The combined leverage at 20,000 bags is 10 and at 25,000 bags is 3.57.

Step by step solution

Income statement at the sales volume of 20,000 bags and at 25,000 bags

Particulars	20,000 bags	25,000 bags
Sales	$200,000 (20,000 x $10)	$250,000 (25,000 x $10)
Less: variable cost	100,000 (20,000 x $5)	125,000 (25,000 x $5)
Contribution	$100,000	$125,000
Less: Fixed cost	80,000	80,000
EBIT	$20,000	$45,000
Less: Interest expenses	10,000	10,000
EBT	$10,000	$35,000

Combined leverage at 20,000 bags

$\begin{array}{rcl} Combined leverage & = & \frac{Contribution}{EBT} \\ = & \frac{$ 100, 000}{10, 000} \\ = & 10 \end{array}$

Combined leverage at 25,000 bags

$\begin{array}{rcl} Combined leverage & = & \frac{Contribution}{EBT} \\ = & \frac{$ 125, 000}{$ 35, 000} \\ = & 3.57 \end{array}$

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Stud Clothier
Balance sheet 20X1
Assets		Liabilities and Equity
Cash	\)60,000	Account payable	\(220,000
Account receivable	240,000	Accrued taxes	30,000
Inventory	350,000	Bonds payable (long term)	150,000
Plant and equipment	410,000	Common stock	80,000
		Paid in capital	200,000
		Retained earnings	380,000
Total assets	\)1,060,000	Total LIbilities and Equity	$1,060,000

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 grapes are $0.10 per pound.
e. What is the degree of combined leverage at both sales levels?

Short Answer

Step by step solution

Income statement at the sales volume of 20,000 bags and at 25,000 bags

Combined leverage at 20,000 bags

Combined leverage at 25,000 bags

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Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

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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 grapes are $0.10 per pound.e. What is the degree of combined leverage at both sales levels?

Short Answer

Step by step solution

Income statement at the sales volume of 20,000 bags and at 25,000 bags

Combined leverage at 20,000 bags

Combined leverage at 25,000 bags

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Organizational Communication

Business Operations

Managers

Intermediate Accounting

Human Resources

Change Management

Study anywhere. Anytime. Across all devices.

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 grapes are $0.10 per pound.
e. What is the degree of combined leverage at both sales levels?