CVP Analysis and Special Decisions Sweet Grove Citrus Company buys a variety of
ID: 2446274 • Letter: C
Question
CVP Analysis and Special Decisions Sweet Grove Citrus Company buys a variety of citrus fruit from growers and then processes the fruit into a product line of fresh fruit, juices, and fruit flavorings. The most recent year's sales revenue was $4,200,000. Variable costs were 60 percent of sales and fixed costs totaled $1,500,000. Sweet Grove is evaluating two alternatives designed to enhance profitability. One staff member has proposed that Sweet Grove purchase more automated processing equipment. This strategy would increase fixed costs by $400,000 but decrease variable costs to 54 percent of sales. Another staff member has suggested that Sweet Grove rely more on outsourcing for fruit processing. This would reduce fixed costs by $400,000 but increase variable costs to 65 percent of sales. Round your answers to the nearest whole number. (a) What is the current break-even point in sales dollars? $Answer (b) Assuming an income tax rate of 37 percent, what dollar sales volume is currently required to obtain an after-tax profit of $300,000? $Answer (c) In the absence of income taxes, at what sales volume will both alternatives (automation and outsourcing) provide the same profit? (d) Briefly describe one strength and one weakness of both the automation and outsourcing alternatives.
Explanation / Answer
Solution :
a.current break-even point in sales dollars
SALES
4200000
VC
2520000
CONTRIBUTION
1680000
FIXED COST
1500000
Profit
180000
BES = FC /CONTRI BUTION PER UNIT
3750000
CONTRIBUTION PER UNIT = 1680000/4200000
b. Dollar sales volume is currently required to obtain an after-tax profit of $300,000
$
Woking
Order in which it is derived
SALES
4,940,476.19
(1976190.48/.40)
4
VC
2,964,285.71
(4940476.19*60%
5
CONTRIBUTION
1,976,190.48
(476190.48+1500000)
3
FIXED COST
1,500,000.00
AS GIVEN
AS GIVEN
PBT
476,190.48
300000/63%
1
TAX @37%
176,190.48
37%
2
PAT
300,000.00
63%
GIVEN
c. Sales volume at which both alternative gives same profit
AUTOMATION
OUTSOURCING
SALES
7,272,727.27
7,272,727.27
VC
3,927,272.73
4,727,272.73
CONTRIBUTION
3,345,454.55
2,545,454.55
FIXED COST
1,900,000.00
1,100,000.00
profit
1,445,454.55
1,445,454.55
let x be the sales volume
x - 0.54x-1900000= x - 0.65x - 1100000
0.11x = 800000
x = 7272727.27
d. Strength & Weakness
AUTOMATION
OUTSOURCING
Strength
Quick processing Possible
Can Concentrate on other process if outsourced
Weakness
Machine downtime/maintenance
Low quality processing by 3rd party
a.current break-even point in sales dollars
SALES
4200000
VC
2520000
CONTRIBUTION
1680000
FIXED COST
1500000
Profit
180000
BES = FC /CONTRI BUTION PER UNIT
3750000
CONTRIBUTION PER UNIT = 1680000/4200000
b. Dollar sales volume is currently required to obtain an after-tax profit of $300,000
$
Woking
Order in which it is derived
SALES
4,940,476.19
(1976190.48/.40)
4
VC
2,964,285.71
(4940476.19*60%
5
CONTRIBUTION
1,976,190.48
(476190.48+1500000)
3
FIXED COST
1,500,000.00
AS GIVEN
AS GIVEN
PBT
476,190.48
300000/63%
1
TAX @37%
176,190.48
37%
2
PAT
300,000.00
63%
GIVEN
c. Sales volume at which both alternative gives same profit
AUTOMATION
OUTSOURCING
SALES
7,272,727.27
7,272,727.27
VC
3,927,272.73
4,727,272.73
CONTRIBUTION
3,345,454.55
2,545,454.55
FIXED COST
1,900,000.00
1,100,000.00
profit
1,445,454.55
1,445,454.55
let x be the sales volume
x - 0.54x-1900000= x - 0.65x - 1100000
0.11x = 800000
x = 7272727.27