Cost-Volume-Profit Analysis and Strategy Sunshine Farms, a wholesaler of ornamental trees and plants for landscaping, and other garden supplies, has been successful in recent years primarily because of great customer serviceflexible credit terms, customized orders (quantities, variety, etc.), and on-time delivery, among others. World Agricultural Products, Inc., Sunshine' parent corporation, has informed Ms. Gonzalez, the director, that her budgeted net income for the coming year will be $180,000. The budget was based on data for the prior year and Ms. Gonzalez's belief that there would be no significant changes in revenues and expenses for the coming period. After the determination of the budget, Gonzalez received notice from Sunshine's principal shipping agent that it was about to increase its rates by 15%. This carrier handles 85% of Sunshine's total shipping volume. Paying the increased rate will result in failure to meet the budgeted income level, and Ms. Gonzalez is understandably reluctant to allow that to happen. She is considering two alternatives. First, it is possible to use another carrier whose rates are 10% less than the old carrier's original rate. The old carrier, however, is a subsidiary of a major customer; shifting to a new carrier will almost certainly result in loss of that customer and sales amounting to $90,000. Assume that prior to the recent rate increase, the shipping costs of the principal carrier and the other carriers were the same, and that costs of the other carriers are not expected to change. As a second alternative, Sunshine can purchase its own trucks thereby reducing its shipping costs to 85% of the original rate. The new trucks would have an expected life of 10 years, no salvage value and would be depreciated on a straight line basis.

Related fixed costs excluding depreciation would be $4,000.

Assume that if Sunshine purchases the trucks, Sunshine will replace the principal shipper and the other shippers.

Following are data from the prior year:

Sales ............................................................ $1,500,000

Variable costs (excluding shipping) ........... 1,050,000

Shipping costs ............................................. 90,000

Fixed costs .................................................. 180,000

REQUIRED: 1. Prepare a contribution for income statement showing net operating income at (a) current budget (b) if they keep the old carrier (c) if they go with the new carrier.

2. Using cost-volume-profit (CVP) analysis and the data provided, determine the maximum amount that Mr. Gonzalez can pay for the trucks and still expect to attain budgeted net income. Create a contribution income statement for this alternative

3. At what price for the truck would Mr. Gonzalez be indifferent between purchasing the new trucks and using a new carrier?

4. Mr. Gonzalez has decided to use a new carrier, but now is worried its apparent lack of reliability may adversely affect sales volume. Determine the dollar amount of sales that Sunshine can lose because of lack of reliability before any benefit from switching carriers is lost completely.

5. Describe what you think is the competitive strategy of Sunshine Farm and Seed Company. What should be the strategy? How would the use of a new carrier affect the strategy?

6. Can Mr. Gonzalez use value chain analysis to improve the profits of Sunshine Farm and Seed Company? If so, explain how briefly.