Ohio Limestone plans to market its product in a new territory. Management estimates that an advertising and promotion program co
sting $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.
1 answer:
Answer: 307.5 tons
Explanation:
To maintain the current Net Income, the company would have to be making a zero profit (breakeven) in the new territory.
Breakeven = Fixed Cost/ Contribution margin
Fixed cost for the new territory = $61,500
Contribution Margin = Sales - Variable cost
Assuming that sales and costs will continue as in 20x1 in the firm’s established territories.
Sales price per unit = 900,000/1,800 tons
= $500 per unit
Variable Cost = 495,000/1,800 tons
= $275 per unit
Variable cost will increase due to sales commission in new territory.
= 275 + 25
= $300 per unit
Contribution Margin for new territory = 500 - 300 = $200
Breakeven point = 61,500/200
= 307.5 tons will need to be sold to maintain net income
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Answer:
The target inventory position is T= 713.6 gallons.
Explanation:
Given:
Average demand =per day = D = 152 Gallons
Standard deviation of demand = σ = 33 Gallons per day
Lead time for delivery = L = 4 days
Z value for 94.5% service level = 1.6
The target inventory position = (Average demand x Lead time) + Safety stock
= (D × L) + (Z× σ × )
= (152 × 4) + (1.6 × 33 × )
= (152 × 4) + (1.6 × 33 × 2)
= 608 + 105.6
= 713.6