Question

please I need the easiest solution for this question straight to the point not too long

Problem 5: The Chatswood Limestone Company produces thin limestone sheets that are used for the facing on buildings. As can be seen in the contribution margin statement, last year the company had a net profit of $157, 500, based on sales of 1 800 tonnes. The manufacturing capacity of the firm's facilities is 3, 000 tonnes per year. Chatswood Limestone Company Contribution margin statement Year ended 31 December $ 900,000 Sales Variable costs: Manufacturing Selling $315, 000 180,000 Total variable costs Contribution margin $495, 000 $405, 000 Fixed costs: Manufacturing Selling Administrative $100,000 107, 500 40,000 Total fixed costs $247, 500 Net Profit $157, 500 Required: 1. Calculate the company's break-even volume, in tonnes, for the most recent year. (ignore income taxes.) 2. If the sales volume is estimated to be 2, 100 tonnes in the next year, and if the prices and costs stay at the same levels, what net profit can management expect next year? 3. The company has an overseas customer who has offered to buy 1, 500 tonnes at $450 per tonne. Assume that all the firm's costs would be at the same levels as in the year just ended. What net profit would the firm earn if it took this order and rejected some business from local customers so as not to exceed production capacity? 4. Chatswood Limestone plans to market its product in a new territory. Management estimates that an advertising and promotion program costing $61, 500 per year would be needed for the next two or three years. In addition, a $25 per tonne sales commission to the sales force in the new territory, over and above the current commission, would be required. How many tonnes would be need to sold in the new territory to maintain the firm's established territories. Problem solving assignment Page 7 of 12 5. Management is considering replacing its labour-intensive production process with an automated production system. This would result in an increase of $58, 500 annually in fixed manufacturing costs. The variable manufacturing costs would decrease by $25 per tonne. Calculate the new break-even volume in tonnes and in sales dollars. 6. Ignore the facts presented in requirement 5. Assume that management estimates that the selling price per tonne will decline by 10 percent next year. Variable costs will increase by $40 per tonne, and fixed costs will not change. What level of sales (dollars) would be required to earn a net profit of $94, 500?

Answer 1

1 BREAK EVEN VOLUME IN TONNES : Sales value per ton = $ 900,000 / 1800 tonnes Sales value per ton = $ 500 per ton Variable cost per ton = $ 495,000 / 1800 tonnes Variable cost per ton = $ 275 per ton Contribution per ton = $ 500 - $ 275 = $ 225 Total Fixed Costs = $ 247,500 Break Even Point = $ 247,500 / $ 225 Break Even Point = 1100 tonnes 2 Total Contribution if 2,100 tonnes are sold = 2,100 tonnes * $ 225 Total Contribution if 2,100 tonnes are sold = $ 472,500 Net Profit After Fixed Costs = $ 472,500 - $ 247,500 Net Profit After Fixed Costs = $ 225,000 3 Total production capacity = 3000 tonnes Current Sales = 1800 tonnes Spare capacity = 3000 - 1800 = 1200 tonnes Foreign customer order is of 1500 tonnes Thus, 300 tonnes sales of local need to be left to complete the order. Contribution on normal sales as calculated above = $ 225 per ton Contribution on overseas sales = $ 450 - $ 275 = $ 175 per ton Total Contribution = ($ 225 * 1500 tonnes) + ($ 175 * 1500 tonnes) Total Contribution = $ 337,500 + $ 262,500 Total Contribution = $ 600,000 Fixed Costs = $ 247,500 TOTAL PROFIT AFTER SATISFYING OVERSEAS ORDER = $ 600,000 - $ 247,500 TOTAL PROFIT AFTER SATISFYING OVERSEAS ORDER = $352,500 4 Additional Fixed Costs = $ 61,500 New Variable Cost = $ 275 + $ 25 = $ 300 per ton Contribution = $ 500 - $ 300 = $ 200 per ton Assuming, maintaining firms established territories means atleast Break Even Point in new territory. Break Even Point in New Territory = $ 61,500 / $ 200 per ton Break Even Point in New Territory = 307.5 tonnes (rounded off to 308 tonnes) 5 New Fixed Costs = $ 247,500 + $ 58,500 = $ 306,000 New Variable Costs = $ 275 - $ 25 = $ 250 per ton Thus Contribution = $ 500 - $ 250 = $ 250 per ton Break Even Point = $ 306,000 / $ 250 Break Even Point = 1224 tonnes 6 New Selling Price = $ 500 - ($ 500 * 10%) = $ 450 per ton New Variable Cost = $ 275 + $ 40 = $ 315 per ton Contribution = $ 450 - $315 = $ 135 per ton Fixed costs = $ 247,500 Net Profit Required = $ 94,500 Amount to be recovered = Net Profit + Fixed Costs Amount to be recovered = $ 94,500 + $ 247,500 Amount to be recovered = $ 342,000 Total Sales to be done = $ 342,000 / $ 135 Total Sales to be done = 2534 tonnes (upper rounding off) Sales required in $ = ($ 342,000 / $135) * $ 450 per ton Sales required in $ = $ 11,40,000