b. Calculate the profit or loss on 12,000 bags and on 25,000 bags.
12,000 x $10 = 120,000
80,000 + .10 x 50lbs x 12,000 = 80,000 + 60,000 = 140,000
120,000 – 140,000 = -20,000 loss
25,000 x $10 = 250,000
80,000 + .10 x 50lb x 25000 = 80,000 + 125000 = 205,000
250,000 – 205,000 = 45,000 profit
c. What is the degree of operating leverage at 20,000 bags and at 25,000 bags?
20,000 bags DOL = 4.6 25,000 bags DOL = 5.0
Why does the degree of operating leverage change as the quantity sold
Increases?
To measure the business risk the DOL measures the EBIT’s percentage change to the level of output by one percent.
d. If Healthy Foods has an annual interest expense of $10,000, calculate the
degree of financial leverage at both 20,000 and 25,000 bags.
20,000 bags x $10 = 200,000 - $10,000 = 190,000 – 80,000 = 110,000
25,000 bags x $10 = 250,000 - $10,000 = 240,000 – 80,000 = 160,000
e. What is the degree of combined leverage at both sales levels?
20,000 bags DCL = 5.6
25,000 bags DCL = 6.3
Oh, I see we're getting into some finance questions now. I hope you're ready for a wild ride!
To calculate the degree of combined leverage, we need to multiply the degree of operating leverage by the degree of financial leverage. So let's plug in the numbers:
20,000 bags DOL = 4.6
20,000 bags DFL = 110,000/80,000 = 1.375
Degree of combined leverage at 20,000 bags = 4.6 x 1.375 = 6.325
25,000 bags DOL = 5.0
25,000 bags DFL = 160,000/80,000 = 2.0
Degree of combined leverage at 25,000 bags = 5.0 x 2.0 = 10.0
So, the degree of combined leverage at both sales levels is 6.325 at 20,000 bags and 10.0 at 25,000 bags. Happy crunching those numbers!
To calculate the degree of combined leverage, we need to multiply the degree of operating leverage (DOL) by the degree of financial leverage (DFL).
For 20,000 bags:
Degree of Combined Leverage = DOL x DFL
DOL = 4.6 (given)
DFL = EBIT / EBT
Since the interest expense is $10,000, and EBT (Earnings Before Tax) is EBIT - interest expense:
EBT = $110,000 - $10,000 = $100,000
DFL = EBIT / EBT = $110,000 / $100,000 = 1.1
Degree of Combined Leverage = 4.6 x 1.1 = 5.06
For 25,000 bags:
Degree of Combined Leverage = DOL x DFL
DOL = 5.0 (given)
DFL = EBIT / EBT
Since the interest expense is $10,000, and EBT (Earnings Before Tax) is EBIT - interest expense:
EBT = $160,000 - $10,000 = $150,000
DFL = EBIT / EBT = $160,000 / $150,000 = 1.0667
Degree of Combined Leverage = 5.0 x 1.0667 = 5.33
So, the degree of combined leverage at 20,000 bags is 5.06, and at 25,000 bags is 5.33.
To calculate the degree of combined leverage, we need to multiply the degree of operating leverage (DOL) by the degree of financial leverage (DFL).
Let's use the given DOL values:
DOL at 20,000 bags = 4.6
DOL at 25,000 bags = 5.0
First, let's calculate the degree of financial leverage (DFL).
DFL = EBIT / (EBIT - Interest Expense)
At 20,000 bags:
EBIT = 110,000
Interest Expense = $10,000
DFL at 20,000 bags = 110,000 / (110,000 - 10,000) = 110,000 / 100,000 = 1.1
At 25,000 bags:
EBIT = 160,000
Interest Expense = $10,000
DFL at 25,000 bags = 160,000 / (160,000 - 10,000) = 160,000 / 150,000 = 1.0667
Now, let's calculate the degree of combined leverage (DCL).
DCL = DOL x DFL
At 20,000 bags:
DOL = 4.6
DFL = 1.1
DCL at 20,000 bags = 4.6 x 1.1 = 5.06
At 25,000 bags:
DOL = 5.0
DFL = 1.0667
DCL at 25,000 bags = 5.0 x 1.0667 = 5.3335
Therefore, the degree of combined leverage at 20,000 bags is approximately 5.06, and at 25,000 bags is approximately 5.3335.