7778
Total Contribution = unit contribution x sales= $5 x $25,000= $125,000
Operating income= Total Contribution -- Fixed Costs= $125,000= $80,000 = $45,000
DOL at 25,000 bags = $125,000/$45,000=2.7778
Why does the degree of operating leverage change as the quantity sold increases?
The Degree of operating leverage is a unit of measure on the return on fixed assets. The degree represents the ratio between a change in profits and a change in revenue. A higher ratio is a sign of increased variability in revenue and therefore higher risk. Higher ratios usually occur when the amount of units sold are closer to the break-even point and usually decreases as the amount of units sold increases. This phenomenon is because fixed costs are decreasing in relative importance and variable costs are increasing in relative...
Thus, the degree of operating leverage is ?declining.
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.
Degree of Financial Leverage= % change in EPS / % change in EBIT
EPS=
EBIT= Earnings Before Interest or Tax=
EPS= Earnings Per Share
% Change in EPS= EBIT
% Change in EBIT= EBIT- Interest Expense
DFL at 20,000 units = 2
Profit when 20,000 units sold= 20,000-16,000= 4000 x 5= 20,000
DFL= 20,000 / 20,000-10,000= 20,000/10,000=2
DFL at 25,000 units= 1.2857
Profit when 25,000 units sold= $45,000
DFL= 45,000/45,000-10,000= 1.2857
E. What is the…
