A steel maker needs 5,000,000 tons of coal next year.The current market price for coal is $70.00 per ton.At this price,the firm expects its EBIT to be $500 million.What will the firm's EBIIT if the firm enters into a supply contract for coal for a fixed price of $72.00 per ton?

Question

Quizplus · Accepted Answer

If the firm enters into a supply contract at $72.00 per ton, it will pay $2 more per ton than the current market price. For 5,000,000 tons, this results in an additional cost of $10 million (5,000,000 tons * $2/ton). Therefore, the EBIT will decrease by $10 million from $500 million to $490 million.

A Steel Maker Needs 5,000,000 Tons of Coal Next Year