Cost-Volume-Profit and Sensitivity Analysis
Timberland produces treated wood chips as a by-product of pulp manufacturing. The Company purchases materials (chemicals, etc.) for $32 per ton of chips. Variable costs, including labor, costs $10 per ton. The chips can be sold for $70 per ton. Fixed costs, all unavoidable, equals $84,000. Timberland’s incremental tax rate is 30%.
1. Prepare a budgeted income statement assuming that Timberland sells 2,500 tons.
2. What is the contribution margin per ton?
3. Calculate breakeven.
4. Assume the Company requires income of $14,000, how much in dollars does Timberland have to sale to achieve $14,000 profit?
5. Now assume the Company wishes to earn $35,711 after tax. What is the target operating income?
6. Next assume the Company now anticipates selling 3,200 tons of chips. Management believes that if $10,000 is invested in advertising the sale of chips will increase to 4,000 tons. Would you recommend the advertising?
7l As an alternative to advertising the factory foreman suggests that if the Company reduces the selling price to $61 per ton sales can be increased to 4,500 tons. Do you recommend the reduction in sales price?
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