Prairie Inc. mines three products. Gold ore sells for $1,000 per ton, variable costs are $600 per ton, and fixed mining costs are $250,000. The segment margin for the year was ($100,000). The management of Prairie Mining was considering dropping the mining of gold ore. Only one-half of the fixed expenses are direct and would be eliminated if the segment was dropped. What were the sales in tons for the year?
A) 62.5 tons
B) 250 tons
C) 375 tons
D) 1,000 tons

Question

Quizplus · Accepted Answer

The segment margin is equal to sales minus variable costs minus fixed costs. So, $100,000 = sales - $600 per ton * tons - $250,000. Since only half of the fixed costs are direct, the fixed costs that would be eliminated if the segment was dropped are $125,000. So, $100,000 = sales - $600 per ton * tons - $125,000. Solving for sales, we get sales = $600 per ton * tons + $225,000. Since the selling price is $1,000 per ton, sales = $1,000 per ton * tons. So, $1,000 per ton * tons = $600 per ton * tons + $225,000. Solving for tons, we get tons = 62.5 tons.