The Florida Citrus Inc. (FCI) produces and veils 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 gallon 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?