Sweet Grove Citrus Company buys a variety of citrus fruit from growers and then
ID: 2426459 • Letter: S
Question
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.
(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 $500,000?
(c) In the absence of income taxes, at what sales volume will both alternatives (automation and outsourcing) provide the same profit?
Explanation / Answer
a) Breakeven Point = Fixed cost / Contribution margin ratio =$ 1,300,000 / 0.40 = $ 3,250,000
Contribution Margin ratio = 100 % - Variable ratio = 100% - 60% = 40% 0r 0.40
b) Desired after tax profit of $ 500,000
Desired Before tax profit = $ 500,000 / (1 - Tax rate) = $ 500,000 / (1 - 0.34) = $ 757,575.758
Sales for Desired After Tax profit = Breakeven sales + (Desired before tax profit / Contribution margin ratio)
= $ 3,250,000 + ( 757,575.758 / 0.40)
= $ 5,143,940
c) Profit from first alternative = Profit from second alternative
Sales X (1-variable expense ratio) - Fixed Cost = Sales X (1- Variable expense ratio) - Fixed Cost
Sales X ( 1 - 0.54) - 1,600,000 = Sales X (1- 0.65) - 1,000,000
0.46 Sales - 0.35 Sales = - 1,000,000 + 1,600,000
0.11 Sales = 600,000
Sales = 600,000 / 0.11
Sales = 5,454,545.45
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