Questions -
Q1. Pinecrest Sales & Service started operations on January 01, 2014. In its first year, sales were $5,000,000. Annual fixed costs are $3,000,000. Variable costs in 2014 were $3,250,000. Compute the break-even sales volume.
Q2. Shula's Beefsteak Tomatoes, LLC, farms tomatoes on a large tract of land in southwest Dade County. Shula's has an opportunity to purchase an adjoining farm owned by Bill Belichick, an unsuccessful tomato farmer who is about to go out of business. VP of Operations, Dan Marino, is trying to decide if he should operate the new farm with traditional, labor-intensive growing and harvesting techniques that have high variable costs with low fixed costs, or invest in new, capital-intensive, advanced-technology equipment, which would result in very low labor costs but very high fixed costs. Budgeted production costs in the table below.
|
Capital Intensive
|
Labor Intensive
|
|
Direct materials per bushel of tomatoes
|
$1.00
|
$1.00
|
|
Direct labor per bushel of tomatoes
|
$0.25
|
$6.00
|
|
Variable manufacturing overhead per bushel
|
$0.06
|
$1.25
|
|
Fixed manufacturing overhead per year
|
$4,500,000
|
$850,000
|
|
Selling price per bushel of tomatoes
|
$25.00
|
$25.00
|
Incremental selling costs are budgeted at $650,000 per year plus $0.25 per bushel sold.
1. What is the break even-even point in bushels for the capital-intensive method?
2. What is the break even-even point in bushels for the labor-intensive method?
3. Determine the number of bushels at which point Shula's Beefsteak Tomatoes would be indifferent between the two methods.
4. Dan Marino has hired you as a consultant to advise him and Coach Shula on the decision at hand. Assume a current sales volume at the point of indifference, calculate the change (increase or decrease) in net income resulting from a 10% increase and a 10% decrease in the number of bushels sold.
5. Assuming a stable, growing economy, which alternative would you recommend? Why?