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

Question

Quizplus · Accepted Answer

The increase in coal price from $70.00 to $72.00 per tonne results in an additional cost of $2.00 per tonne. For 5,000,000 tonnes, this is an additional cost of $10 million ($2.00 * 5,000,000). Subtracting this from the original EBIT of $500 million gives $490 million.

A Steel Maker Needs 5 000 000 Tonnes of Coal