Question

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 Sales $ 900, 000 Variable costs:  Manufacturing $315, 000 Selling 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 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.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 Sales $ 900, 000 Variable costs:  Manufacturing $315, 000 Selling 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 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

Answer 1

Company’s break-even volume, in tonnes
	Total Fixed costs for year	$                                    247,500.00
	Contribution margin per tonne	$                                            225.00
	Break even tonne = Total Fixed costs / Contribution margin per tonne
	Break even tonnes =	247500/225
	Break even tonnes =	1100	Tonne
A	Total Sales	$                                    900,000.00
B	Total variable costs	$                                    495,000.00
C	Contribution margin	$                                    405,000.00
D	Sales (Tonnes)	1800
A/D	S.P (per tonne)	$                                            500.00
B/D	Variable cost per tonne	$                                            275.00
C/D	Contribution margin per tonne	$                                            225.00

Net Profit at 2100 tonnes
S.P per tonne	$                                            500.00
less: variable cost per tonne	$                                            275.00
Contribution margin per tonne	$                                            225.00
* Sales (tonne)	2100
Total Contribution	$                                    472,500.00
Less: Fixed costs for the year	$                                    247,500.00
Net profit for the year	$                                    225,000.00

Net profit the firm would earn if it took this order and rejected some business from local customers
Net Profit for year At 1800 Tonnes	$                                    157,500.00
Add : Increase in contribution margin for 1500 tonnes	$                                    262,500.00	1500 * ( 450 - 275)
less : Decrease in contribution margin for 300 tonnes	$                                     (67,500.00)	300* ( 500-275)
Net profit for year	$                                    352,500.00
Total capacity is restricted to 3000 tonnes so if order by overseas customer is accepted company would lose 3000 tonnes to local market

	Tonnes that would be needed to sold in the new territory to maintain the firm’s established territories
A	Increase in fixed costs	$                                       61,500.00
	Existing Contribution margin per tonne	$                                            225.00
	Increase in variable cost per Tonne (commission)	$                                              25.00
B	Revised contribution per tonne	$                                            200.00
A/B	Tonnes that would be needed to sold in the new territory to maintain the firm’s established territories	307.5

New break-even volume in tonnes and in sales dollars
	Increase in fixed costs	$                                       58,500.00
	Existing Fixed costs	$                                    247,500.00
A	Total fixed costs	$                                    306,000.00
	Existing contribution margin per tonne	$                                            225.00
	Add: saving in variable costs per tonne	$                                              25.00
B	Revised contribution margin per tonne	$                                            250.00
	Break even tonne = Total Fixed costs / Contribution margin per tonne
A/B	Break even tonne =	306000/250
A/B	Break even tonne =	1224	Tonne
C	Break even tonne =	1224
D	S.P	$                                            500.00
C*D	Break even Sales (Dollars)	$                                    612,000.00

Level of sales (dollars) required to earn a net profit of $94, 500
	Net profit required	$                                       94,500.00
	Existing Fixed costs per year	$                                    247,500.00
A	Total contribution Margin to be earned	$                                    342,000.00
	Current S.P per tonne	$                                            500.00
	New S.P per tonne	$                                            450.00	(500-10%)
	Current Variable cost per tonne	$                                            275.00
	New Variable costs per tonne	$                                            315.00	(275+40)
	New S.P per tonne	$                                            450.00
	New Variable costs per tonne	$                                            315.00
B	Revised Contribution margin per tonne	$                                            135.00
A/B	Tonnes to be sold to earn required contribution margin	342000/135
A/B	Tonnes to be sold to earn required contribution margin	2,533.33
	*New S.P per tonne	$                                            450.00
	Level of sales (dollars) required	$                                 1,140,000.00

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