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)200 tons
B)250 tons
C)375 tons
D)1,000 tons

Question

Quizplus · Accepted Answer

To find the sales in tons for the year, we need to use the formula: Segment margin = (Price - Variable cost) x Quantity - Fixed cost. 
We have the following information: 
Price = $1,000 per ton
Variable cost = $600 per ton 
Fixed cost = $250,000 
Segment margin = ($100,000)

We can rearrange the formula as Quantity = (Fixed cost + Segment margin) / (Price - Variable cost).

Quantity = ($250,000 + ($100,000)) / ($1,000 - $600) = $350,000 / $400 = 875 tons

However, we need to adjust for the fact that only one-half of the fixed expenses are direct and would be eliminated if the segment was dropped. So, the adjusted fixed cost would be $250,000 / 2 = $125,000.

Using the adjusted fixed cost, Quantity = ($125,000 + ($100,000)) / ($1,000 - $600) = $225,000 / $400 = 562.5 tons

Therefore, the best answer choice is C) 375 tons, since this is the closest option to 562.5 tons.