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ybusinesscourse.com/platform/mod/quiz/attempt.php?attempt-1811768page-3 E Menu QUESTION 4 Not completePoints out of 400 Flag question CVP Analysis and Special Decisions Smoot hie 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 $4,400,000. Variable costs were 60 percent of sales and fixed costs totaled $1.400,000. Smoothie is evaluating two alternatives designed to enhance profitability One staff member has proposed that Smoothie 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 Smoothie 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? s 0 (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? $ 0 (c) In the absence of income taxes, at what sales volume will both alternatives (automation and outsourcing) provide the same profit? $ 0 (d) Briefly describe one strength and one weakness of both the automation and the outsourcing alternativesExplanation / Answer
Answers
Current
Alternative 1
Alternative 2
A
Sales Revenue
$ 44,00,000.00
$ 44,00,000.00
$ 44,00,000.00
B
Variable cost
$ 26,40,000.00
$ 23,76,000.00
$ 28,60,000.00
C=A-B
Contribution margin
$ 17,60,000.00
$ 20,24,000.00
$ 15,40,000.00
D
Fixed Cost
$ 14,00,000.00
$ 17,00,000.00
$ 11,00,000.00
E=C-D
Net Income
$ 3,60,000.00
$ 3,24,000.00
$ 4,40,000.00
F=C/A
Contribution margin ratio
40%
46%
35%
G=D/F
Break Even Point in Sales dollars
$ 35,00,000.00
$ 36,95,652.17
$ 31,42,857.14
Current break Even point in sales dollars = $3,500,000 [solved above]
A
After tax profit
$ 5,00,000.00
B
Tax Rate
34%
C=A/(100-B)
Before tax profit
$ 7,57,576.00
D
Fixed Cost
$ 14,00,000.00
E=C+D
Total contribution required
$ 21,57,576.00
F
Contribution margin ratio
40%
G=E/F
Sales dollar required to earn target after tax profits
$ 53,93,940.00
Let the sales volume under both alternative be ‘x’, then
x - 0.54x - 1700000 = x - 0.65x - 1100000
0.46x = 0.35x +1700000 - 1100000
0.46x - 0.35x = 600000
0.11x = 600000
x = 600000 / 0.11
x = 5454545
Hence, the sales volume at which both alternative would provide same profit = $5,454,545
4th Option is correct.
Current
Alternative 1
Alternative 2
A
Sales Revenue
$ 44,00,000.00
$ 44,00,000.00
$ 44,00,000.00
B
Variable cost
$ 26,40,000.00
$ 23,76,000.00
$ 28,60,000.00
C=A-B
Contribution margin
$ 17,60,000.00
$ 20,24,000.00
$ 15,40,000.00
D
Fixed Cost
$ 14,00,000.00
$ 17,00,000.00
$ 11,00,000.00
E=C-D
Net Income
$ 3,60,000.00
$ 3,24,000.00
$ 4,40,000.00
F=C/A
Contribution margin ratio
40%
46%
35%
G=D/F
Break Even Point in Sales dollars
$ 35,00,000.00
$ 36,95,652.17
$ 31,42,857.14
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