Hey Chegg, I need help with this question. The answers that are highlighted in b
ID: 2484912 • Letter: H
Question
Hey Chegg, I need help with this question. The answers that are highlighted in bold are correct. Can you show me how you arrive at those correct answers. Please show me the full work on questions a, b, and c. Also, can you explain why the 3rd choice for the question D is correct. It would help me a lot. Thank you.
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 $1,300,000. 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 $300,000 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 $300,000 but increase variable costs to 65 percent of sales.
Round your answers to the nearest whole number.
(b) Assuming an income tax rate of 34 percent, what dollar sales volume is currently required to obtain an after-tax profit of $500,000?
(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 the outsourcing alternatives.
Automation has less risk and a lower break-even point.
Outsourcing has higher profits if sales increase.
Automation has less risk. Outsourcing has higher profits if sales increase and a lower break-even point. Automation has higher profits if sales increase and a lower break-even point. Outsourcing has less risk.
Explanation / Answer
a) sales revenue 4,200,000 Variable cost 2,520,000 Contribution 1,680,000 FC 1,300,000 BEP 3,250,000 (1300000/1680000*4200000) b) sales revenue 4,200,000 Variable cost 2,520,000 Contribution 1,680,000 FC 1,300,000 PBT 380,000 Tax 129,200 PAT 250,800 desired profit 500,000 desired profit pre tax 757,575.76 500000/(100%-34%) ADD: FC 2,057,575.76 Required sales 5,143,939.39 2057575.75/1680000*4200000 c) sales revenue 5,454,545 sales revenue 5,454,545 Variable cost 2,945,454 Variable cost 3,545,454 Contribution 2,509,091 Contribution 1,909,091 FC 1,600,000 FC 1,000,000 profit 909,091 BEP 909,091