CVP Analysis and Special Decisions Smoothie Company produces fruit purees which it sells to smoothie bars and health clubs. Assume the most recent year's sales revenue was $5,800,000. Variable costs were 55% of sales and fixed costs totaled $1,560,000. 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 $250,000 but decrease variable costs to 50 percent of sales. • Another staff member has suggested that Smoothie rely more on outsourcing for fruit processing. This would reduce fixed costs by $250,000 but increase variable costs to 60 percent of sales. Round your answers to the nearest whole number. (a) What is the current break-even point in sales dollars? $Answer (b) Assuming an income tax rate of 20 percent, what dollar sales volume is currently required to obtain an after-tax profit of $1,000,000? $Answer (c) In the absence of income taxes, at what sales volume will both alternatives (automation and outsourcing) provide the same profit?

CVP Analysis and Special Decisions Smoothie Company produces fruit purees which it sells to smoothie bars and health clubs. Assume the most recent year's sales revenue was $5,800,000. Variable costs were 55% of sales and fixed costs totaled $1,560,000. 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 $250,000 but decrease variable costs to 50 percent of sales. • Another staff member has suggested that Smoothie rely more on outsourcing for fruit processing. This would reduce fixed costs by $250,000 but increase variable costs to 60 percent of sales. Round your answers to the nearest whole number. (a) What is the current break-even point in sales dollars? $Answer (b) Assuming an income tax rate of 20 percent, what dollar sales volume is currently required to obtain an after-tax profit of $1,000,000? $Answer (c) In the absence of income taxes, at what sales volume will both alternatives (automation and outsourcing) provide the same profit?

Name: CVP Analysis and Special DecisionsSmoothie Company produces fruit pur
Uploaded: 2024-03-20T06:33:06.000Z
Channel: Bartleby
Description: CVP Analysis and Special DecisionsSmoothie Company produces fruit purees which it sells to smoothie bars and health clubs. Assume themost recent year's sales revenue was $5,800,000. Variable costs were 55% of sales and fixed coststotaled $1,560,000.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter7: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 59P: Cost-Volume-Profit, Margin of Safety Victoria Company produces a single product. Last years income...

See similar textbooks

Similar questions

Segmented Income Statement, Management Decision Making FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows: Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTimes vice president of marketing. Required: 1. CONCEPTUAL CONNECTION Jim believes that by increasing advertising by 1,000 (250 for the scented line and 750 for the musical line), sales of those two lines would increase by 30%. If you were Kathy, how would you react to this information? 2. CONCEPTUAL CONNECTION Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%. Given this information, would it be profitable to eliminate the scented and musical lines? 3. CONCEPTUAL CONNECTION Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial? Identify the best combination for the firm.
Cost-Volume-Profit, Margin of Safety Victoria Company produces a single product. Last years income statement is as follows: Required: 1. Compute the break-even point in units and sales dollars calculated using the break-even units. 2. What was the margin of safety for Victoria last year in sales dollars? 3. Suppose that Victoria is considering an investment in new technology that will increase fixed cost by 250,000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?
Segment variable costing income statement and effect on operating income of change in operations Valdespin Company manufactures three sizes of camping tentssmall (S), medium (M), and large (L). The income statement has consistently indicated a net loss for the M size, and management is considering three proposals: (1) continue Size M, (2) discontinue Size M and reduce total output accordingly, or (3) discontinue Size M and conduct an advertising campaign to expand the sales of Size S so that the entire plant capacity can continue to be used. If Proposal 2 is selected and Size M is discontinued and production curtailed, the annual fixed production costs and fixed operating expenses could be reduced by 46,080 and 32,240, respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of 34,560 for the rental of additional warehouse space would yield an additional 130% in Size S sales volume. It is also assumed that the increased production of Size S would utilize the plant facilities released by the discontinuance of Size M. The sales and costs have been relatively stable over the past few years, and they are expected to remain so for the foreseeable future. The income statement for the past year ended June 30, 20Y9, is as follows: Instructions 1. Prepare an income statement for the past year in the variable costing format. Use the following headings: Data for each size should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin, as reported in the Total column, to determine operating income. 2. Based on the income statement prepared in (1) and the other data presented, determine the amount by which total annual operating income would be reduced below its present level if Proposal 2 is accepted. 3. Prepare an income statement in the variable costing format, indicating the projected annual operating income if Proposal 3 is accepted. Use the following headings: Data for each style should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin as reported in the Total column. For purposes of this problem, the expenditure of 34,560 for the rental of additional warehouse space can be added to the fixed operating expenses. 4. By how much would total annual operating income increase above its present level if Proposal 3 is accepted? Explain.
Cost Classification, Income Statement Gateway Construction Company, run by Jack Gateway, employs 25 to 30 people as subcontractors for laying gas, water, and sewage pipelines. Most of Gateways work comes from contracts with city and state agencies in Nebraska. The companys sales volume averages 3 million, and profits vary between 0 and 10% of sales. Sales and profits have been somewhat below average for the past 3 years due to a recession and intense competition. Because of this competition, Jack constantly reviews the prices that other companies bid for jobs. When a bid is lost, he analyzes the reasons for the differences between his bid and that of his competitors and uses this information to increase the competitiveness of future bids. Jack believes that Gateways current accounting system is deficient. Currently, all expenses are simply deducted from revenues to arrive at operating income. No effort is made to distinguish among the costs of laying pipe, obtaining contracts, and administering the company. Yet all bids are based on the costs of laying pipe. With these thoughts in mind, Jack looked more carefully at the income statement for the previous year (see below). First, he noted that jobs were priced on the basis of equipment hours, with an average price of 165 per equipment hour. However, when it came to classifying and assigning costs, he needed some help. One thing that really puzzled him was how to classify his own 114,000 salary. About half of his time was spent in bidding and securing contracts, and the other half was spent in general administrative matters. Required: 1. Classify the costs in the income statement as (1) costs of laying pipe (production costs), (2) costs of securing contracts (selling costs), or (3) costs of general administration. For production costs, identify direct materials, direct labor, and overhead costs. The company never has significant work in process (most jobs are started and completed within a day). 2. Assume that a significant driver is equipment hours. Identify the expenses that would likely be traced to jobs using this driver. Explain why you feel these costs are traceable using equipment hours. What is the cost per equipment hour for these traceable costs?
Product pricing using the cost-plus approach methods; differential analysis for accepting additional business Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of 1,500,000 in assets. The costs of producing and selling 5,000 units of flat panel displays are estimated as follows: Crystal Displays Inc. is currently considering establishing a selling price for flat panel displays. The president of Crystal Displays has decided to use the cost-plus approach to product pricing and has indicated that the displays must earn a 15% return on invested assets. Instructions 1. Determine the amount of desired profit from the production and sale of flat panel displays. 2. Assuming that the product cost method is used, determine (A) the cost amount per unit, (B) the markup percentage, and (C) the selling price of flat panel displays. 3. (Appendix) Assuming that the total cost method is used, determine (A) the cost amount per unit, (B) the markup percentage (rounded to two decimal places), and (C) the selling price of flat panel displays. (Round markup to nearest whole dollar.) 4. (Appendix) Assuming that the variable cost method is used, determine (A) the cost amount per unit, (B) the markup percentage (rounded to two decimal places), and (C) the selling price of flat panel displays. (Round markup to nearest whole dollar.) 5. Comment on any additional considerations that could influence establishing the selling price for flat panel displays. 6. Assume that as of August 1, 3,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 2,000 additional units are expected to be sold during the remainder of the year at the normal product price determined under the product cost method. On August 3, Crystal Displays Inc. received an offer from Maple Leaf Visual Inc. for 800 units of flat panel displays at 225 each. Maple Leaf Visual Inc. will market the units in Canada under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Crystal Displays Inc. The additional business is not expected to affect the domestic sales of flat panel displays, and the additional units could be produced using existing factory, selling, and administrative capacity. A. Prepare a differential analysis of the proposed sale to Maple Leaf Visual Inc. B. Based on the differential analysis in part (A), should the proposal be accepted?
Decision on accepting additional business A manager of Varden Sporting Goods Company is considering accepting an order from an overseas customer. This customer has requested an order for 20,000 dozen golf balls at a price of 22 per dozen. The variable cost to manufacture a dozen golf balls is 18 per dozen. The full cost is 25 per dozen. Varden has a normal selling price of 35 per dozen. Vardens plant has just enough excess capacity on the second shift to make the overseas order. What are some considerations in accepting or rejecting this order?
Special-Order Decision, Qualitative Aspects Randy Stone, manager of Specialty Paper Products Company, was agonizing over an offer for an order requesting 5,000 boxes of calendars. Specialty Paper Products was operating at 70% of its capacity and could use the extra business. Unfortunately, the orders offering price of 4.20 per box was below the cost to produce the calendars. The controller, Louis Barns, was opposed to taking a loss on the deal. However, the personnel manager, Yatika Blaine, argued in favor of accepting the order even though a loss would be incurred. It would avoid the problem of layoffs and would help to maintain the companys community image. The full cost to produce a box of calendars follows: Later that day, Louis and Yatika met over coffee. Louis sympathized with Yatiks concerns and suggested that the two of them rethink the special-order decision. He offered to determine relevant costs if Yatika would list the activities that would be affected by a layoff. Yatika eagerly agreed and came up with the following activities: an increase in the state unemployment insurance rate from 1% to 2% of total payroll, notification costs to lay off approximately 20 employees, and increased costs of rehiring and retraining workers when the downturn was over. Louis determined that these activities would cost the following amounts: Total payroll is 1,460,000 per year. Layoff paperwork is 25 per laid-off employee. Rehiring and retraining is 150 per new employee. Required: 1. CONCEPTUAL CONNECTION Assume that the company will accept the order only if it increases total profits (without taking the potential layoffs into consideration). Should the company accept or reject the order? Provide supporting computations. 2. CONCEPTUAL CONNECTION Consider the new information on activity costs associated with the layoff. Should the company accept or reject the order? Provide supporting computations.