Question

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.

Answer 1

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