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Q1. Multiple-Level Break-Even Analysis
Nielsen Associates provides marketing services for a number of small manufacturing firms. Nielsen receives a commission of 10 percent of sales. Operating costs are as follows:
Unit-level costs $0.02 per sales dollar
Sales-level costs $200 per sales order
Customer-level costs $800 per customer per year
Facility-level costs $60,000 per year
(a) Determine the minimum order size in sales dollars for Nielsen to break even on an order.
(b) Assuming an average customer places five orders per year, determine the minimum annual sales required to break even on a customer.
(c) What is the average order size in (b)?
(d) Assuming Nielsen currently serves 100 customers, with each placing an average of five orders per year, determine the minimum annual sales required to break even.
(e) What is the average order size in (d)?
Q2. Profitability Analysis
Assume a local Cost Cutters provides cuts, perms, and hairstyling services. Annual fixed costs are $120,000, and variable costs are 40 percent of sales revenue. Last year's revenues totaled $250,000.
(a) Determine its break-even point in sales dollars.
(b) Determine last year's margin of safety in sales dollars.
(c) Determine the sales volume required for an annual profit of $80,000.
Q3. CVP Analysis and Special Decisions
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?