Timberland produces treated wood chips as a by-product of pulp manufacturing. Th

Question

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%.
Required:
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?

Explanation / Answer

1) Particulars Amount Sales 175000 Direct material 80000 variable costs 25000 Contribution 70000 Fixed costs 84000 net income -14000 2) contribution margin/ tonne = 70000/2500 = 28/ tonne answer 3) Breakeven Let no of quantity sold be X X * 70 = X * 32 + X*10 + 84000 X = 84000/28 = 3000units answer 4) to achieve income of 14000, you need contribution of 20000+84000 = 104000 contribution/ tonne = 28 No of tonnes need to sell = 104000/28 = 3715 Sales = 3715* 70 = 260050answer 5) Now assume the Company wishes to earn $35,711 after tax. What is the target operating income? To earn 35711 after tax, you need to earn 51015 pre tax Therefore target operating income = 51015 + 84000 = rs135015 answer 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? Now see the company is earning breakeven at 3000 units, so at 3200 units it will definately be earning a profit. So we should just compare the incremental benefit with increnmental cost so, Incremental Cost = 10000 Incremental benefit = 800*28 = 22400 Since the benefit exceeds the costs,, so advertising should be taken 7) 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? Profit when 3200 units are sold at $70/ tonne = 3920 Profit when 4500 units are sold at $61/ tonne = 1050 No this recommendation shjould not be accpeted as theoverall profut gets reduced Happy tl help

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