The Cotswold Limestone Company produces thin limestone sheets that are used for the facings 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 1800 tonnes. The manufacturing capacity of the firm’s facilities is 3000 tonnes per year.
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 2100 tonnes in the next year, and if the prices and costs stay at the same levels and amounts, what net profit can management expect next year?
3. The company has an overseas customer who has offered to buy 1500 tonnes at $450 per tonne. Assume that all the firm’s costs would be at the same levels and rates as in the year just ended. What net profit would the firm earn if it took this order and rejected some business from loca customers so as not to exceed production capacity?
4. Cotswold Limestone plans to market its product in a new territory. Management estimates that an advertising and promotion program costing $61500 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 need to be sold in the new territory to maintain the firm’s current net profit? Assume that sales costs will continue as in the year just ended in the firm’s established territories.
5. Management is considering replacing its labour-intensive production 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 tonne. Calculate the new break-even volume in tonnes and in sales dollars.
6. Ignore the facts presented in requirement 5. Assume that management estimates that the selling price per tonne will decline by 10 percent next year. Variable costs will increase by $40 per tonne, and fixed costs will not change. What sales volume in dollars would be required to earn a net profit of $94 500?