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.

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 level of sales (dollars) would be required to earn a net profit of $94, 500?