Business Finance Healthy Foods Inc. Term Paper

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Total Length: 491 words ( 2 double-spaced pages)

Total Sources: 12

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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.

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This phenomenon is because fixed costs are decreasing in relative importance and variable costs are increasing in relative importance as the number of units sold increases. 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=….....

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