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 $1,200,000. 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 $200,000 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 $200,000 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 39 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

(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 higher profits if sales increase and a lower break-even point. Outsourcing has less risk.

Automation has higher profits if sales increase. Outsourcing has less risk and a lower break-even point.

Automation has less risk. Outsourcing has higher profits if sales increase and a lower break-even point.

Answer 1

Ans a
Current breakeven	in $
Fixed cost/CM ratio
1200000/.4	3000000
CM ratio (4200000*40%)/4200000*100	40
ans b
Before tax profit is 500000/(1-.39)	819672
Sales=Target profit+Fixed cost/CM ratio
(819672+1200000)/.4	5049180
ans c
	in $
Profit of automation=profit on outsourcing
(1-.54)s-(1200000+200000)=(1-.65)s-(1200000-200000)
.46s-.35s= 400000
s=400000/.11	3636364
ans d
Automation has higher profits if sales increase. Outsourcing has less risk and a lower break-even point.
If outsourced Break even is=1200000-200000/0.35	2857143
If automated Breakeven is 1200000+200000/0.46	3043478
In current situation outsourcing is better
If any doubt please comment