Question

Norman Borlaug has a wheat farm which produces 20,000 units and typically can produce them for $0.58 each with fixed costs of $3,000. The current market price for wheat forces them to sell their units for $0.71 each. Because of the tough market conditions, one of their competitors is looking to exit the business and instead rent their land out for $4,500 a month. Borlaug believes with the additional land they could produce and sell an extra 80,000 units each with the same variable cost of $0.58 per unit. However by creating these additional units and adding supply to the market, the company would then sell all the wheat it produces from both farms for $0.68 per unit.

1. Create a contribution income statement which can be used to determine whether Borlaug needs the second farm in order to turn a profit.

2. Create a CVP graph for profitability levels for every 10,000 units from 0 to 100,000 units with the appropriate title and axes labels added

3. Determine the number of units they would need to break-even. Save and submit the spreadsheet with that number entered into the units sold input.

Notes: keep in mind that now the revenues and fixed expenses are changing based on whether we need the second farm, meaning that you will need an IF statement for both the revenues and fixed expenses of the contribution income statement, but not the variable expenses. In addition, when creating the revenues and expenses columns to make the CVP graph, both columns will take IF statements as, once again, the revenues and fixed expenses both change if we need two farms. If everything is set up correctly, the break-even should be 75,000 units. As always, feel free to email me with any questions and best of luck!

Answer 1