Contribution Margin

Question

Alberta Oilseed Co. processes rapeseed to produce canola oil and rapeseed meal.
The company can process up to 20,000 tonnes of rapeseed per year. The
company pays growers $800 per tonne, and each tonne yields $2000 worth of oil
and meal. Variable processing costs are $470 per tonne, and fixed processing
costs are $3,400,000 per year at all production levels. Administrative overhead is
$3,000,000 per year regardless of the volume of production. Marketing and
transportation costs work out to $230 per tonne processed.

 

a) Using the contribution margin approach, determine the break-even volume in
terms of:
i. tonnes of rapeseed processed per year.
ii. percent capacity utilization.
iii. dollar amount of product sales for the year.

b) In order to attain a net income of $2,400,000 in a year, how many tonnes of
rapeseed must be processed and sold in the year?

Answer 1

1) Contribution per ton =  2000 - 800 -470 -230 = 500/ton

 

We have 500 x =  6,400,000 ( total fixed cost )

 

x =  12,800 tons

 

2) The percentage of plant utilization is12,800/20000 * 100  = 64% plant utilization

 

3)  20,000 tons * 2,000 /ton =  $40,000,000  ,40 million in sales

 

2  We have

 

500x  -6,400,000 = 2,400,000

500x  =  8,800,000

x = 1,760 tons  which it can do since it is less than plant capacity

 

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