Florida Citrus Inc. (FCI) produces and sellsa highly popular sports drink in the North Americanmarket. In the current year, it will sell 20 million barrels of drinks in the Asian market. For many years, ithas sold in the Asian market through a Tokyo-basedimporter. The contract with the importer is up forrenewal, and FCI decides to reconsider its Asianstrategy. After much analysis, it decides that threealternatives warrant further consideration.• Option 1. Stay with the importer: Sell throughthe current importer who manages all the marketing and distribution of FCI’s sports drink in theAsian market. FCI receives a net payment of $5per barrel (net after transportation costs and importduties) sold in the Asian market.• Option 2. Move to production licensing:License production of FCI drinks to a Japanesebeverage firm who also will manage its marketingand distribution. This firm will charge FCI a fixedfee of $5 million each year to cover its costs ofmaintaining the quality of FCI products. It will payFCI $10 per barrel of FCI products it sells in Asia.• Option 3. Turn to self-production: Purchase afully operational beverage plant from a Japanesecompany with excess capacity. The annual fixedcosts of operating the plant are $30 million, and thevariable costs are $60 per barrel. FCI will sell toindependent wholesalers in Asia at $100 a barrel.(a) Compute the break-even point for each of thethree options that FCI is considering.(b) At which unit sales level (barrels) of FCI products in Asia would FCI report the same operating income under options 2 and 3?(c) If FCI expects the sports drink sales volume inAsia to be somewhere between 800,000 barrels and 950,000 barrels, which option wouldyou recommend?
Florida Citrus Inc. (FCI) produces and sells
a highly popular sports drink in the North American
market. In the current year, it will sell 20 million barrels of drinks in the Asian market. For many years, it
has sold in the Asian market through a Tokyo-based
importer. The contract with the importer is up for
renewal, and FCI decides to reconsider its Asian
strategy. After much analysis, it decides that three
alternatives warrant further consideration.
• Option 1. Stay with the importer: Sell through
the current importer who manages all the marketing and distribution of FCI’s sports drink in the
Asian market. FCI receives a net payment of $5
per barrel (net after transportation costs and import
duties) sold in the Asian market.
• Option 2. Move to production licensing:
License production of FCI drinks to a Japanese
beverage firm who also will manage its marketing
and distribution. This firm will charge FCI a fixed
fee of $5 million each year to cover its costs of
maintaining the quality of FCI products. It will pay
FCI $10 per barrel of FCI products it sells in Asia.
• Option 3. Turn to self-production: Purchase a
fully operational beverage plant from a Japanese
company with excess capacity. The annual fixed
costs of operating the plant are $30 million, and the
variable costs are $60 per barrel. FCI will sell to
independent wholesalers in Asia at $100 a barrel.
(a) Compute the break-even point for each of the
three options that FCI is considering.
(b) At which unit sales level (barrels) of FCI products in Asia would FCI report the same operating income under options 2 and 3?
(c) If FCI expects the sports drink sales volume in
Asia to be somewhere between 800,000 barrels and 950,000 barrels, which option would
you recommend?
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