Florida Citrus Inc. (FCI) produces and sells a sport drink in the North American
ID: 2799054 • Letter: F
Question
Florida Citrus Inc. (FCI) produces and sells a sport drink in the North American market. For years, it has sold in the Asian market through a Tokyo-based importer. The contract with the importer is up for renewal, and FCI decides to reconsider its Asian strategy. After much analysis, it decides that three alternatives warrant further consideration. OPTION1: STAY WITH THE IMPORTER. Sell through the current importer who manages all the marketing and distribution of FCI's sport drink in the Asian market. The cost for FCI to produce a barrel in the U.S. and ship it to Japan is $91 per barrel. There are no fixed costs. The importer pays FCI $117 per barrel sold in the Asian market. OPTION 2: MOVE TO PRODUCTION LICENSING. License production of FCI drinks to a Japanese beverage firm who also will manage marketing and distribution. This firm will charge FCI a fixed fee of $6.2 million each year to cover its costs of maintaining the quality of FCI products. It will pay FCI $43 per barrel sold in the Asian market. OPTION 3: TURN TO SELF PRODUCTION. FCI purchased a fully operational beverage plant from a Japanese company with excess capacity. FCI has already spent $4.7 million to retrofit the beverage plant. The annual fixed costs of operating the plant are $44 million (which does not include the previously spent $4.7 million retrofit cost), and the variable cost is $60 per barrel. FCI will sell to independent wholesalers in Asia at $141 per barrel. The most profitable option depends on how many barrels FCI will sell in Asia. What is the maximum number of barrels that FCI can sell for option 1 to be the best option?
Explanation / Answer
Answer:
Break even formula = sell price * no of barrels sold = fixed cost + variable cost * no of barrels sold
To find out the maximum barrel we will have to first see at the option 3 break even point,what are other option profits.
Option 1 Profit per barrel sold $26 ( $117-91) Option 2 Fixed cost $6.2 million Per barrel amount earned $43 Break even point for option 2(using the formula mentioned above) 144186.047 barrel Option 3 Spent on retrofit $4.7 million Annual fixed costs $44 million Variable cost per barrel $60 Sell price $141 Break even point for option 3 601234.568To find out the maximum barrel we will have to first see at the option 3 break even point,what are other option profits.
At the break even point of option 3 Profit in option 1 and option 2 Option 1 $15,632,098.77 Option 2 $19,653,086.42 From here you can see that option 3 is out of the picture itself as profit from option 2 is exceeding option 1. Now, we have to see between option 1 and 2 At the maximum barrel point profit of option 1 and option 2 will be same Option 1 profit = 26* no of barrels sold Option 2 profit = 43 *no of barrels sold - $6.2 million( fixed cost) putting both of them equal to get the maximum barrel Let the maximum no of barrels be x 26*X = 43*X - 6.2 million 6.2 million = 17*X X = 364706 approx barrelsRelated Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.