CVPAnalysis 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 years sales rev-

enue 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.

Onestaffmemberhas proposedthatSweetGrovepurchase moreautomatedprocessingequip-

ment. Thisstrategy wouldincrease fixed costsby $300,000 butdecrease variable coststo 54

percent of sales.

Another staff member hassuggested that SweetGrove rely moreon outsourcing forfruit pro-

cessing. Thiswould reduce fixedcosts by$300,000 but increasevariable coststo 65 percent

of sales.

Required

a.What is the current break-even point in sales dollars?

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?

c.In the absence of income taxes, at what sales volume will both alternatives (automation and

outsourcing) provide the same profit?

d.Briefly describe one strength and one weakness of both the automation and the outsourcing

alternatives.