Question : 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 firm's facilities is 3000 tonnes per year.

Precision 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 2100 tonnes in the next year, and if the price 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 1500 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. 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 firm's current net profit? Assume that sales and cots 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