Question 7

Northern Rivers Orchards Ltd grows avocadoes, macadamia nuts and mangoes for the commercial wholesale markets.

Unit sales, price and cost data for the last year were as follows:

Avocadoes Macadamias Mangoes

Sales Volume 40,000 trays 160,000 kg 40,000 trays

Average Price $30/tray $10/kg $10/tray

Variable Costs $10/tray $2/kg $5/tray

Fixed Costs $40,000 $100,000 $20,000

1. If corporate expenses of $160,000 are allocated across the three product divisions based on sales revenue, prepare a divisional performance report across the three product divisions. (6 marks)

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2. Comment on the results in a) with the help of the net profit margin (NPM) for each division. Recall the NPM is sales revenue/net profit. You can ignore any taxes.

(3 Marks)

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3. Management is now proposing that they remove the mango trees and replace them with macadamias. The estimated volume of macadamias is expected to increase to 240,000kg after 5 years while the avocadoes will remain unchanged.

The cost of this change is expected to be $100,000 but the corporate costs are expected to be reduced permanently to $120,000 each year.

Also, because it takes several years for new macadamia trees to produce. There will be no change in the sales volume of macadamias for the next year. Assume average prices and variable costs also remain unchanged for several years but the annual fixed costs for macadamias will increase to $150,000 immediately.

1. Calculate next years expected profit. (4 marks)

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2. Calculate the expected profit in 5 years time when the new macadamia trees reach full production. (4 Marks)

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