Question

Ohio Limestone Company produces thin limestone sheets used for cosmetic facing on buildings. The following income statement represents the operating results for the year just ended. The company had sales of 1,800 tons during the year The manufacturing capacity of the firm's facilities is 3,000 tons per year. (Ignore income taxes.) OHIO LIMESTONE COMPANY Income Statement For the Year Ended December 31, 20x1 Sales $900,000 Variable costs: beats Manufacturing $315,000 Selling costs 180,000 Total variable costs $495,000 Contribution margin $405,000 Fixed costs: Manufacturing $100,000 Selling 107,500 Administrative 40,000 Total fixed costs $ 247,500 Net income $157,500 5. Management is considering replacing its labor intensive 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 ton Compute the new break-even volume in tons and in sales dollars. Break-even volume in tons Break-even point in sales dollars

Answer 1

Last Year:

Units sold = 1,800 tons

Selling price per ton = $900,000 / 1,800
Selling price per ton = $500

Variable cost per ton = $495,000 / 1,800
Variable cost per ton = $275

Fixed costs = $247,500

Next Year:

Selling price per ton = $500

Variable cost per ton = $275 - $25
Variable cost per ton = $250

Fixed costs = $247,500 + $58,500
Fixed costs = $306,000

Contribution margin per ton = Selling price per ton - Variable cost per ton
Contribution margin per ton = $500 - $250
Contribution margin per ton = $250

Breakeven volume in tons = Fixed costs / Contribution margin per ton
Breakeven volume in tons = $306,000 / $250
Breakeven volume in tons = 1,224

Breakeven point in sales dollars = Breakeven volume in tons * Selling price per ton
Breakeven point in sales dollars = 1,224 * $500
Breakeven point in sales dollars = $612,000