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, 20x 1

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

Required:

1. Calculate the company’s break-even volume in tons for 20x1.

2. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs stay at the same levels and amounts, what is the net income that management can expect for 20x2?

3. Ohio Limestone has been trying for years to get a foothold in the European market. The company has a potential German customer that has offered to buy 1,500 tons at $450 per ton. Assume that all the firm’s costs would be at the same levels and rates as in 20x1. What net income would the firm earn if it took this order and rejected some business from regular customers so as not to exceed capacity?

4. 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.

5. Management is considering replacing its labor-intensive 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 ton. Compute the new break-even volume in tons and in sales dollars.

6. Ignore the facts presented in requirement (5). Assume that management estimates that the selling price per ton would decline by 10 percent next year. Variable costs would increase by $40 per ton, and fixed costs would not change. What sales volume in dollars would be required to earn a net income of $94,500 next year?