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.) OHTO 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 3. Ohio Limestone has been trying for years to get a foothold in the European market. The company has a potential German customer that has offered to buy 1,500 tons at $450 per ton. Assume that all of the firm's costs would be at the same levels and rates os in 20x1. What net income would the firm earn if it took this order and rejected some business from regular customers so as not to exceed capacity? Net income

Answer 1

Variable cost varies with number of output thus it is always a relevant cost in decision making as it results in incremental cash outflow.Fixed cost remains constant irrespective of number of output thus it is irrelevant to decision making as same will incurred whether offer is accepted or rejected at maximum capacity of 3000 units

since acceptance of offer is outside the firms maximum capacity 1800 regular sales +1500 = 3300units ,firm has to forgo some regular sales.Regular unit sales to be forgone = 3300-3000 maximum capacity = 300 units

sales in units will be as follows :

regular sales= 1800-300 forgone =1500 units

special offer sales= 1500 units

	Unit price/cost
sales	900000/1800=500
variable cost	495000/1800 =275
contribution margin	225

3)Net income if offer is accepted = 352500

		Net Income
Revenue
from regular sales (1500*500)	750000
special offer sales (1500*450)	675000
Total sales		1425000
less:variable cost (3000*275)		-825000
contribution margin		600000
less:fixed cost		-247500
net income		352500