CVP Analysis Hemp, an agricultural product, is a natural fiber that has many industrial and com-

CVP Analysis Hemp, an agricultural product, is a natural fiber that has many industrial and com- mercial uses, including handbags, backpacks, hats, paper, rope, industrial fabrics, and clothing. In some areas of the world, particularly Australia, Canada, and the United States, hemp is viewed as a potentially significant new opportunity for agricultural production, and business and agricultural leaders are studying the strategic issues involved in making further investments in the crop. For exam- ple, an agricultural analysis by the Manitoba, Canada, Department of Agriculture has developed the following estimated costs for producing hemp. This analysis is based on an average farm in which 180 acres would be planted. Assume machinery operating costs, crop insurance, land taxes, licens- ing fees, sampling and analytical fees, and other costs are fixed relative to the production of hemp, while the other costs are variable per pound produced. Also, assume seed prices of $4.00 per pound,

a 20-pound per acre seeding rate, and crop yield of 400 pounds per acre. The costs associated with investment in land and machinery are ignored in the analysis, on the assumption that these costs would remain the same whether or not the farmer grows hemp.

Required Calculate the price per pound that a farmer on an average-sized farm would have to receive to break even on the production of hemp.

Estimated Operating Costs per Acre for the Production of Hemp

Seed

$80.00

Fertilizer

38.15

Chemicals

10.00

Fuel

11.00

Machinery operating costs

15.00

Crop insurance

6.00

Other costs

7.50

Land taxes

5.50

Licensing fee

15.00

Sampling and analytical fees

15.00

Drying costs

3.57

Cleaning costs

5.00

Interest on operating costs

7.44

Q51

Multiple Product CVP Analysis Headlines Publishing Company (HPC) specializes in international business news publications. Its principal product is HPC-Monthly, which is mailed to subscribers the first week of each month. A weekly version, called HPC-Weekly, is also available to subscribers over the Web at a higher cost. Sixty percent of HPC’s subscribers are nondomestic customers. The company experienced a fast growth in subscribers in its first few years of operation, but sales have begun to slow in recent years as new competitors have entered the market. HPC has the following cost structure and sales revenue for its subscription operations on a yearly basis. All costs and all subscrip- tion fees are in U.S. dollars.

Fixed Cost

$306,000 per year

Variable Costs

Mailing $0.60 per issue

Commission 3.00 per subscription

Administrative 1.50 per subscription

Sales Mix Information (constant in sales units)

HPC-Weekly 20%

HPC-Monthly 80%

Selling Price

HPC-Weekly $47 per subscription

HPC-Monthly 19 per subscription

Required Use these data to determine the following:

Contribution margin for weekly and monthly subscriptions.

Contribution margin ratio for weekly and monthly subscriptions.

HPC’s breakeven point in sales units and sales dollars.

HPC’s breakeven point to reach a target before-tax profit of $75,000.

What are the critical success factors for HPC? For its domestic subscribers? For its international sub- scribers? How can CVP analysis be used to make HPC more competitive?