Question

(The following information applies to the questions displayed below.) 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 yea 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: Manufacturing $315,000 Selling costs 180.000 Total variable costs $495,000 Contribution margin $405,000 Pixed costs: Manufacturing $100,000 Selling 107,500 Administrative 40,000 Total fixed costs $ 247,500 Net income $157,500 4. Ohio Limestone plans to market its product in a new territory. Management estimates that an advertising and promotion pre costing $61,500 annually would be needed for the next two or three years. In addition, a $25 per ton sales commission to force in the new territory, over and above the current commission, would be required. How many tons would have to be sol new territory to maintain the firm's current net income? Assume that sales and costs will continue as in 20x1 in the firm's est territories. (Round your answer to 1 decimal place.) Number of tons to be sold

Answer 1

Answer:

Total variable cost per ton on December 31, 20X1 = Total variable costs / No. of tons sold

                                                                                                    = 495000 / 1800

                                                                                                   = $275

Additional Sales commission to sell a ton in new territory = $25

Therefore, the new variable cost per ton = $275 + $25

                                                               = $300

The company will need $61,500 in addition to the previous year’s total fixed costs for advertising and promotional activities.

Therefore, the new total fixed costs = $247,500 + $61,500

                                                                = $309,000

Selling price per ton = Sales amount / no. of tons sold

                                     = $900,000 / 1800

                                     = $500

To maintain the firm’s current net income,

Sales in tons * selling price – sales in tons* variable cost per ton – Total fixed cost = Profit

Let the sales in tons be X, substituting the known values, we get

X * 500 – X * 300 – 309,000 = 157,500

200 X – 309,000 = 157500

200 X = 157500 + 309000

200 X = 466500

X = 2332.5 tons

2332.5 tons has to be sold to maintain the previous year’s net income.