P16-31 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% 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% of sales. Required

a. What is the current break-even point in sales dollars?

b. Assuming an income tax rate of 20%, what dollar sales volume is currently required to obtain an after-tax profit of $1,000,000?

c. In the absence of income taxes, at what sales volume will both alternatives (automation and out- sourcing) provide the same profit?

d. Briefly describe one strength and one weakness of both the automation and the outsourcing alternatives.