Chapter 2: 13BP_d (page 148)

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 per pound.
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.

Expert verified

The financial leverage at 19,000 bags is 1.32 and at 24,000 bags is 1.14.

Step by step solution

$\begin{array}{rcl} Financial leverage & = & \frac{EBIT}{EBT} \\ = & \frac{$ 61, 250}{$ 46, 250} \\ = & 1.32 \end{array}$

$\begin{array}{rcl} Financial leverage & = & \frac{EBIT}{EBT} \\ = & \frac{$ 123, 750}{$ 108, 750} \\ = & 1.14 \end{array}$

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Times mirror and glass company
Sales	\(126,000
Less: Cost of goods sold	93,000
Gross profit	\)33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\(18,000
Less: Interest expenses	3,000
Earning before taxes	\)15,000
Less: Taxes (30%)	4,500
Earning after taxes	$10,500