CVP Analysis and Special Decisions

Smoothie Company produces fruit purees which it sells to smoothie bars and health clubs. Assume the most recent years sales revenue was $5,800,000. Variable costs were 55% of sales and fixed costs totaled $1,560,000. 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 $250,000 but decrease variable costs to 50 percent of sales.
• Another staff member has suggested that Smoothie rely more on outsourcing for fruit processing. This would reduce fixed costs by $250,000 but increase variable costs to 60 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 20 percent, what dollar sales volume is currently required to obtain an after-tax profit of $1,000,000? $Answer (c) In the absence of income taxes, at what sales volume will both alternatives (automation and outsourcing) provide the same profit? $Answer