Question

Consider a chocolate maker that will need 10,000 tons of cocoa beans next year. Suppose the current market price of cocoa beans is $1400 per ton. At this price, the firm expects earnings before interest and taxes of $22 million next year. What will the firm's EBIT be if the price of cocoa beans rises to $1950 per ton? What will EBIT be if the price of cocoa falls to $1200 per ton? What will EBIT be in each scenario if the firm enters into a supply contract for cocoa beans for a fixed price of $1450 per ton?

Answer 1

Chocolate maker need Coco beans 10000 tons

price per ton $1400

EBIT at this price =$ 22,000,000

(a)

Coco beans is input for maker. so if cost increases, EBIT will decline

Coco beans price next year= $1950

Increase in price = 1950-1400= $550

Cost increase = no of tons * increase in price per ton

10000*550

5500000

New EBIT = current EBIT - cost increase

22000000-5500000

$16500000

So, new EBIT at $1950 per ton is $16500000

(b)

Price is decreased, so EBIT will increase

Coco beans price next year= $1200

Decrease in price = 1400-1200= $200

Cost decrease = no of tons * decrease in price per ton

10000*200

2000000

New EBIT = current EBIT + cost decrease

22000000+2000000

$24000000

So, new EBIT at $1200 per ton is $24000000

(c)

Coco beans price next year= $1450

Increase in price = 1450-1400= $50

Cost increase = no of tons * increase in price per ton

10000*50

500000

New EBIT = current EBIT - cost increase

22000000-500000

$21500000

So, new EBIT at $1450 per ton is $21500000

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