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 $1,300,000. 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.

(a) What is the current break-even point in sales dollars?
$Answer

(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?
$Answer

(c) In the absence of income taxes, at what sales volume will both alternatives (automation and outsourcing) provide the same profit?
$Answer

Answer 1

a	Break even point =	Fixed cost / contribution margin ratio
		$1300000/.40
		$3250000
	Contribution margin ratio =	100% - variable ratio
		100% - 60% =40%
b	Desired after tax profit of $500000
	Desired before tax profit =	$500000/(1-0.34)
		$757575.76
	sales for desired after tax profit =	Breakeven sales + (Desired before tax profit / contribution margin ratio)
		$3250000 + (757575.76/.40)
		$5143940
c	profit from first alternative =	profit from second alternative =
	sales*(1-variable expense ratio)- fixed cost =	sales*(1-variable expense ratio)- fixed cost
	Sales* (1-0.54)-1600000 =	Sales*(1-.65)-1000000
	.46 sales - .35 sales =	($1000000)+$1600000
	.11 sales =	$600000
	Sales =	$600000/.11
		$5454545.45