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CVP Ananlysis for given manual and mechanized processes

Zan Azlett and Angela Zesiger have joined forces to start A&Z Lettuce Products, a processor of packaged shredded lettuce for institutional use. Zan has years of food processing experience, and Angela has extensive commercial food preparation experience. The process will consist of opening crates of lettuce and then sorting, washing, slicing, preserving and finally packaging the prepared lettuce. Together, with help from vendors, they feel they can adequately estimate demand, fixed costs, revenues and variable cost per five-pound bag of lettuce. They think a largely manual process will have monthly fixed costs of $37,500 and variable costs of $1.75 per bag. A more mechanized process will have fixed costs of $75,000 per month with variable costs of $1.25 per five-pound bag. They expect to sell the shredded lettuce for $2.50 per five-pound bag.

(a) What is the break-even quantity for the manual process?
(b) What is the revenue at the break-even quantity for the mechanized process?
(c) What is the break-even quantity for the mechanized process?
(d) What is the revenue at the break-even quantity?
(e) What is the monthly profit or loss of the manual process if they expect to sell 60,000 bags of lettuce per month?
(f) What is the monthly profit or loss of the mechanized process if they expect to sell 60,000 bags of lettuce per month?
(g) At what quantity would Zan and Angela be indifferent to the process selected?
(h) Over what range of demand would the manual process be preferred over the mechanized process? Over what range of demand would the mechanized process be preferred over the manual process?

Solution Preview

Please refer attached file for better clarity of solution.

(a) What is the break-even quantity for the manual process?
Manual Process
Fixed Cost=F=$37,500.00
Variable Cost per unit=V=$1.75
Price Per unit=P=$2.50
BEP=F/(P-V)=50000 Bags

(b) What is the revenue at the break-even quantity for the mechanized process?
Mechanized Process
Fixed Cost=F=$75,000.00
Variable Cost per unit=V=$1.25
Price Per unit=P=$2.50
BEP=F/(P-V)=60000 Bags
Break even revenue=BEP*P=$1,50,000.00

(c) What is the break-even quantity for the ...

Solution Summary

Solution depicts the steps to calculate BEP, total revenue, total cost and monthly profit in the given cases.

$2.19