Please Help me! I need to calulate break even point & degree of oper leverage in popcorn sales!?

Question

I am having difficulty in understand the calculations for break-even point and degree of operation leverage - please help!

Local catering sells 50-pound bags of popcorn to schools for $10 a bag. The fixed costs of this operation is $80,000, while variable costs of popcorn are .10 per pound.

What is the break even point?
Calculate profit or loss on 12,000 bags and on 25,000 bags.
What is the degree of operating leverage at 20,000 bags and at 25,000 bags?

If someone can assist me in learning this, I would appreciate it.
Thank you. Need by Friday!

Answer 1

break even point is that volume of sales which neither makes a profit nor incurs a loss
here cost of 50 pound bags=80,000+n*50*0.10
revenue=n*10
equating these two we get 80,000+5n=10n
transposing and solving n=16,000 bags
so if the company sells 16000 bags of 50 pounds they will break even,that is neither incur loss nor make profit

cost of 12,000 bags=80,000(F.C.)+60,000(V.C.)=140,000
revenue=12,000*10=120,000 so a loss of $20,000

cost of 25,000 bags=80,000(F.C.)+25,000*5(V.C.)=205,000
revenue=25,000*10=250,000 and so a profit of $45,000

cost of 20,000 bags=80,000+100,000=180,000
and so the break even point is $9/bag
so they have a leverage of selling at $9/bag.by fore going theirr entire profit or fix a suitable price above $9/bag

we have already calculated the break even price when they sell
25,000 bags.they can forego thei profit entirely and sell
@$ 8.20/bag without incurring a loss

we find that the operating leverage varies directly as the no of bags sold more the no of bags more will be the operating leverage

Answer 2

To calculate breakeven point (no profit or loss):

fixed costs / (selling price per unit minus variable cost per unit)

this means:

80,000 / $10 - $5 (,10/lb x 50 lb. bags)

$80,000/$5 = $16,000 breakeven point

To calculate profit or loss:

Revenue - variable costs = contribution margin
Contribution margin - fixed costs = gross profit

Degree of operating leverage:
the measure of how much we rely on fixed costs vs. variable costs; more fixed costs means more risks in terms of profits.

contribution margin / operating income (aka gross profit) = operating leverage

if sales are above or below a certain percentage, the impact will be multiplied by the degree of operating leverage.

P.S. how to calculate target income:

fixed costs + profit / (selling price per unit minus variable costs per unit)

Answer 3

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