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 EBIT if the firm enters into a supply contract for coal for a fixed price of $72.00 per ton?
A)$500 million
B)$510 million
C)$490 million
D)$350 million
E)$410 million

Question

Quizplus · Accepted Answer

If the firm enters into a supply contract for coal for a fixed price of $72.00 per ton, the total cost of coal would be: 
$72.00/ton x 5,000,000 tons = $360,000,000

The revenue from selling the steel product will remain the same, but the cost will increase. Therefore, the new EBIT will be: 
EBIT = Revenue - Cost 
EBIT = $500,000,000 - $360,000,000 
EBIT = $140,000,000

Therefore, the firm's new EBIT will be $490 million ($500 million - $10 million increase in cost). Therefore, the best answer is option C.

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