Question

Ohio Limestone Company produces thin limestone sheets used for cosmetic facing on buildings. The following income...

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:
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

  1. Ohio Limestone plans to market its product in a new territory. Management estimates that an advertising and promotion program costing $61,500 annually would be needed for the next two or three years. In addition, a $25 per ton sales commission to the sales force in the new territory, over and above the current commission, would be required. How many tons would have to be sold in the new territory to maintain the firm’s current net income? Assume that sales and costs will continue as in 20x1 in the firm’s established territories. (Round your answer to 1 decimal place.)

What are the # of tons sold?

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Answer #1

Old Variable Cost Per Ton = Total Variable Cost / Total Sales in Ton

= $495000 / 1800 = $275 Per Ton

Total New Variable Cost Per Ton = Old Variable Cost Per Unit + Sales Commission Per Ton

= $275 + $25

= $300

Total New Fixed Cost = Total old Fixed Cost + Advertising and Promotion Expenses

= $247500 + $61500

= $309000

Sale Price Per Ton = $900000 / 1800 = $500 per ton

New Contribution Per Unit = $500 - $300 = $200

New Sales in Ton = (Old Net Income + New Fixed Cost) / New Contribution Per Unit

= ($157500 + $309000) / $200

= 2332.5 tons

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