University Catering sells 50-pound bags of popcorn to university dormitories for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of the popcorn are $. 10 per pound a. What is the break-even point in bags? b. Calculate the profit or loss on 12,000 bags and 25,000 bags c. What is the degree of operating leverage at 20,000 bags and 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases? d. If University Catering has an annual interest payment of$10,000, calculate the degree of financial leverage at both 20.000 and 25.000 bags What is the degree of combined leverage at both sales levels? Solution: University Catering 80.000 . bE= $80,000 =16,000bags $10-($.10×50 12,000bags25,000bags Sales a 10 per bag $120,000 $250,000 Less:Variables Costs($5) (60,000)(125,000) Fixed Costs (80000 (80.000) Profit or loss ($20,000) 45.000 DOL Q(P-VC) Q(P-VC)-FC doL at 20.000 20000($10-$5) 20,000($10-$5)-$80000 $100000 5.00X $20000 S-171 Copyright o by The McGraw-Hill Companies. InCopyright © 2005 by The McGraw-Hill Companies, Inc. S-171 5-10. University Catering sells 50-pound bags of popcorn to university dormitories for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of the popcorn are $.10 per pound. a. What is the break-even point in bags? b. Calculate the profit or loss on 12,000 bags and 25,000 bags. c. What is the degree of operating leverage at 20,000 bags and 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases? d. If University Catering has an annual interest payment of $10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags. e. What is the degree of combined leverage at both sales levels? Solution: University Catering ( ) 16,000 bags $5 $80,000 $10 $.10 50 $80,000 a. BE = = −  = b. 12,000 bags 25,000 bags Sales @ $10 per bag $120,000 $250,000 Less: Variables Costs ($5) (60,000) (125,000) Fixed Costs (80,000) (80,000) Profit or Loss ($ 20,000) $ 45,000 ( ) Q (P VC) FC Q P VC c. DOL − − − = ( ) ( ) 5.00x $20,000 $100,000 20,000 $10- $5 $80,000 20,000 $10 $5 DOL at 20,000 = = − − =