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