Automatic versus Manual Processing

Photo Station Company operates a printing service for customers with digital cameras. The current service, which requires employees to download photos from customer cameras, has monthly operating costs of $6,000 plus $0.20 per photo printed. Management is evaluating the desirability of acquiring a machine that will allow customers to download and make prints without employee assistance. If the machine is acquired, the monthly fixed costs will increase to $10,000 and the variable costs of printing a photo will decline to $0.04 per photo.

(a) Determine the total costs of printing 20,000 and 50,000 photos per month.

Units Current Process Proposed Process
20,000
50,000

(b) Determine the monthly volume at which the proposed process becomes preferable to the current process.

1High-Low Cost Estimation
Assume the local DHL delivery service hub has the following information available about fleet miles and operating costs:
Year Miles Operating Costs
2012 556,000 $182,000
2013 684,000 214,000

Use the high-low method to develop a cost-estimating equation for total annual operating costs. (Let X = annual fleet miles.)

Total annual costs = Answer + Answer * X
3. 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. (Round your answers to the nearest dollar.) 

4. Contribution Income Statement and Operating Leverage 

Florida Berry Basket harvests early-season strawberries for shipment throughout the eastern United States in March. The strawberry farm is maintained by a permanent staff of 10 employees and seasonal workers who pick and pack the strawberries. The strawberries are sold in crates containing 100 individually packaged one-quart containers. Affixed to each one-quart container is the distinctive Florida Berry Basket logo inviting buyers to "Enjoy the berry best strawberries in the world!" The selling price is $100 per crate, variable costs are $85 per crate, and fixed costs are $275,000 per year. In the year 2013, Florida Berry Basket sold 50,000 crates.

(a) Prepare a contribution income statement for the year ended December 31, 2013. HINT: Use a negative sign with both "costs" answers.
FLORIDA BERRY BASKET
aIncome Statement
For the Year Ended December 31, 2013

Sales $
Variable costs
Contribution margin
Fixed costs
Net income $

(b) Determine the company's 2013 operating leverage. (Round your answer to two decimal places.)

(c) Calculate the percentage change in profits if sales decrease by 10 percent. (Round your answer to one decimal place.) 

(d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $375,000 and reduce variable costs to $81.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answers two decimal places.)

The acquisition of the berry-picking machines will decrease variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage.

The acquisition of the berry-picking machines will increase variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby decreasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage.

The acquisition of the berry-picking machines will increase variable costs, thereby increasing the contribution margin. It will also decrease fixed costs, thereby decreasing the difference between the contribution margin and net income. The net effect would be a decrease in operating leverage.

The acquisition of the berry-picking machines will reduce variable costs, thereby increasing the contribution margin. It will also reduce fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be a decrease in operating leverage.

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.

Round your answers to the nearest whole number.

(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?

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

Automation has less risk and a lower break-even point.

Outsourcing has higher profits if sales increase.

Automation has higher profits if sales increase. Outsourcing has less risk and a lower break-even point.

Automation has less risk. Outsourcing has higher profits if sales increase and a lower break-even point. Automation has higher profits if sales increase and a lower break-even point. Outsourcing has less risk.