Question 3: CVP relationships The Precision 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 firms facilities is 3000 tonnes per year.

4. Precision 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 need to be sold in the new territory to maintain the firms current net profit? Assume that sales and cots will continue as in the year just ended in the firms established territories.

Precision Limestone Company Contribution margin statement Year ended 31 December Sales $900 000 Variable costs Manufacturing Selling $315 000 180 000 Total variable costs Contribution margin $495 000 $405 000 Fixed costs Manufacturing Selling Administrative $100 000 107 500 40 000 Total fixed costs Net profit $247 500 $157 500