Deep Pit Mining 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 2016 was $(100,000). The management of Deep Pit 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 2016?
A) 1,000 tons
B) 375 tons
C) 250 tons
D) 200 tons

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per ton for gold ore:

Contribution Margin = Selling Price - Variable Costs
Contribution Margin = $1,000 - $600
Contribution Margin = $400 per ton

Then, we can use the formula for segment margin:

Segment Margin = (Sales in Tons x Contribution Margin) - Fixed Costs

We know that the segment margin for 2016 was $(100,000) and that only one-half of the fixed expenses are direct and would be eliminated if the segment was dropped. This means that the remaining fixed costs would be $125,000.

$100,000 = (Sales in Tons x $400) - $375,000
$475,000 = Sales in Tons x $400
Sales in Tons = 1,187.5

However, we need to adjust for the fact that we are dropping half of the fixed expenses. This means that we need to subtract $125,000/($400/ton) = 312.5 tons from our sales in tons.

Sales in Tons = 1,187.5 - 312.5 
Sales in Tons = 875

Therefore, the sales in tons for 2016 is approximately 875 tons, which is closest to choice B (375 tons).

Deep Pit Mining Mines Three Products