Sunburst Veggies is a vertically-integrated company which both grows[1] and processes organic vegetables. Their company-grown vegetables are canned and then sold wholesale to grocery stores. The company began their operations in San Marcos, Texas in the mid-1990s and the corporate headquarters remain there. Sunburst grows a wide variety of organic (non-GMO) vegetables in greenhouses, some of which cover more than 200 acres. The vegetables are shipped from manufacturing facilities near the greenhouses. This assures the vegetables are processed as quickly as possible after being picked which inspired the companys marketing tag line: fresh from the field.

Consumer demand for organically-grown vegetables has increased tremendously since Sunburst began operations. Gross revenues increased 500% since they opened 10 years ago. The firm now has five greenhouses and processing plants in multiple locations near the following cities: Sacramento, California; San Marcos, Texas; Baton Rouge, Louisiana; Montgomery, Alabama; and Jacksonville, Florida. Their work force totals nearly 600 employees.

Potential Sites: Sunburst is at maximum capacity in all locations and must add another greenhouse and processing plant in order to continue their sales growth to new customers (and to assure they have no out-of-stock issues for existing customers). Both the greenhouse operations for growing the vegetables and the canning facility require large volumes of fresh water. It is essential to locate near an interstate highway because all shipments are shipped via semi-trucks.

Two sites are being considered near the towns of Gulfport, Mississippi and Little Rock, Arkansas. Because of the extensive damage caused in Gulfport by Hurricane Katrina in August 2005 (and more recently by Hurricane Harvey), the cost of real estate in that area is significantly lower than in Little Rock.

Estimated Operating Costs: Estimates of operating costs for the two locations are as follows:

Gulfport Little Rock

Life of greenhouse & processing plant 50 years 50 years

Expected annual sales (# cases) 300,000 300,000

Selling price (average per case) $90 $90

Variable costs (average per case) $60.00 $60.00

Fixed Costs (annual):

Salaries & fringe benefits (labor is higher in L.R.) $1,300,000 $1,500,000

Depreciation* $445,000 $475,000

Other fixed costs $655,000 $655,000

Total Fixed Costs $2,400,000 $2,630,000

*Straight-line depreciation over 50 years, calculated based on the initial investment in buildings with -0- salvage. Equipment is depreciated using straight-line over 20 years with -0- salvage value. Land is not depreciated. Calculation has been simplified more than would be in business...only for use in this problem.

Estimated Capital Investment: Sunburst has some used greenhouse equipment which they could transfer from one of their existing locations to either Gulfport or Little Rock. The book value of that equipment is $1,900,000 and requires some modifications up-front (cost of $100,000) to get it ready for use in either location. They already own some used manufacturing equipment that can be transferred to either new location; this has a book value of $1,000,000 (and, does not require any modification). The summary of the estimated initial capital investment in each of the two locations follows:

Gulfport Little Rock

Land $4,000,000 $7,500,000

Greenhouse Buildings $3,500,000 $4,000,000

Manufacturing Building $10,000,000 $11,000,000

Sub-total for Buildings $13,500,000 $15,000,000

Greenhouse Equipment (used):

Book value (transferred) $1,900,000 $1,900,000

Modifications (up-front) $100,000 $100,000

Manufacturing Equipment (used):

Book Value (transferred) $1,000,000 $1,000,000

Other equipment (to be capitalized) $500,000 $500,000

Sub-total for Equipment $3,500,000 $3,500,000

Total $21,000,000 $26,000,000

Depreciation Calculations (as shown in total on previous page):

Gulfport Buildings $13,5000,000 / 50 years = $270,000

Gulfport Equipment $3,500,000 / 20 years = $175,000

Total Depreciation Gulfport = $445,000

Little Rock Buildings $15,000,000 / 50 years = $300,000

Little Rock Equipment $3,500,000 / 20 years = $175,000

Total Depreciation Little Rock = $475,000

Other Relevant Information:

Minimum desired rate of return is 12%.

All current locations are earning an average 14% return on sales.

Payback period for all prior capital investments has been not more than 3.75 years.

For simplicity, assume there are no income taxes.

REQUIRED QUANTITATIVE ANALYSIS (Use formulas/cell references):

a.) Prepare an Income Statement in the Contribution Margin format for both locations.

b.) Calculate Breakeven Point (in Sales Dollars) for each location

REQUIRED RECOMMENDATION AND QUALITATIVE ANALYSIS:

ANSWER 1 and 2, please!

1.) Based on quantitative data alone, which alternative would you recommend and why?

2.) Would your recommendation change based on qualitative factors? Qualitative factors might include available workforce, logistical considerations, risk from weather events, potential impact of global warming, access to customers. How would you quantify qualitative factors? ***If there are qualitative factors that you are unable to quantify, would you still consider them? If so, why?