CVP Analysis and Special Decisions

Smoothie 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 $$4,400,000.$ Variable costs were $60$ percent of sales and fixed costs totaled $$1,400,000.$ Smoothie is evaluating two alternatives designed to enhance profitability.

One staff member has proposed that Smoothie 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 Smoothie 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

$3,500,000$

$($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

$8,266,667$

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

$Answer

$6,000,000$