Question

The Fraser Paper Company produces large rolls of white paper weighing 1,000 kilograms for wholesalers for $1,500 each. The wholesalers then cut the paper into standard-sized sheets and package it in 2-kilogram packages. These packages are sold to printers for $4 per package. There is no waste in the cutting process. Fraser Paper currently produces 5 million kilograms of paper annually at a fixed cost of $1 million and a variable cost of $0.80 per kilogram. If Fraser bypassed the wholesalers and cut its own paper for sale directly to printers, Fraser would have to add equipment and personnel with an annual fixed cost of $650,000. Incremental variable costs would be $0.10 per kilogram.

Required:
1-a.	Calculate the annual profit from further processing. (Enter your answer in whole dollars, not in millions.)

1-b.	Should Fraser cut its own paper or continue to sell to wholesalers?

           

	Cut the paper themselves
	Continue to sell to wholesalers

Answer 1

- X fac la A B D EF sales revenue less: variable costs contribution margin less: fixed costs net profit current $ 7,500,000 $ 4,000,000 $ 3,500,000 $ 1,000,000 $ 2,500,000 proposed $ 10,000,000 $ 4,500,000 $ 5,500,000 $1,650,000 $ 3,850,000 annual profit from further processing = $3,850,000 - $2,500,000 annual profit from further processing = $ 1,350,000 1b Fraser should Cut the paper themselves reason - because of the increase in annual profit by $1,350,000 I

for formulas and calculations, refer to the image below -

- x fc la A B C D E F sales revenue less: variable costs contribution margin less: fixed costs net profit current =5000000*1.5 =5000000*0.8 =D3-D4 = 1000000 =D5-D6 proposed =5000000*2 =5000000*0.9 =E3-E4 = 1000000+650000 =E5-E6 1a annual profit from further processing = $3,850,000 - $2,500,000 annual profit from further processing = =E7-D7 Fraser should Cut the paper themselves reason - because of the increase in annual profit by $1,350,000

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