The Sunnyside Fruit Farms operated at the break-even point of $1,125,000 during

Question

The Sunnyside Fruit Farms operated at the break-even point of $1,125,000 during summer 2005 while incurring fixed costs of $450,000. Management is considering two alternatives to reduce the break-even point. Alternative A can trim fixed cots by $100,000 annually; doing so, however, will reduces the quality of the product and result in a 10% decrease in selling price, though no change is the number of bushels sold is expected.

Alternative B will substitute mechanical fruit picking equipment for certain operations now performed manually. This will result in an annual increase of $150,000 in fixed costs, but it will lead to a 5% decrease in variable costs per bushel produced, with no change in product quality, selling price, or sales volume.

a.what is the total contribution margin during summer 2005?
b.what is the break-even sales in dollars under alternative A?
c.what is the break even in dollars under alternative B?
d.what should Sunnyside Fruit Farms do?

Explanation / Answer

(a) Breakeven point = 1125000 Breakeven point x contribution margin ratio = 450000 1125000 x contribution margin ratio = 450000 Contribution margin ratio = 450000/1125000 = 40% Total contribution margin = 1125000 x 0.4 = $450000 (b) Breakeven sales in dollars = (450000 - 100000)/(0.4/(1x 0.9)) = $787500 (c) Breakeven sales in dollars = (450000 + 150000)/(0.4 x 1.05)= $1428571 (d) Since alternative A results in a lower breakeven sales in dollaes, Sunnyside Farms should choose to switch to Alternative A. Hope this helps!

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