Marginal Costing

Topics: Variable cost, Cost, Costs Pages: 7 (1282 words) Published: April 12, 2013
TINTIN & HADDOCK PLC
Internal Memorandum

To:Mr Jone, Chairman
From:
Date:
Subject: Evaluation of the different proposals to improve profits

Following the recent board meeting, we have evaluated the different proposals and come up with one project that we recommend. In doing this, we have calculated the change in profits compared with the draft budget and compiled the Break-even charts to justify our recommendation. Marginal Costing Profit Statement of the draft budget

£(000)£ (000)
Sales1000
Less Cost of sales:
Direct Materials320
Direct wages200
Contribution380
Less Fixed Costs:
Selling and distribution overheads120
Loss(20)
Unit selling price = 1,000,000/50,000 = £20
Unit variable cost = 620,000/50,000= £12.4
Contribution per unit = 20-12.4= £7.6
PROPOSAL A
Workings
Salesmen commission of 10% of sales = 10% * 1,000,000
= £100,000
Sales commission will be £2 per unit.

Variable costs = 320,000+300,000+100,000
= £720,000

Variable cost per unit = 720,000/50,000
= £14.4 per unit

Contribution per unit= 20 -14.4
= £5.6 per unit

C/S ratio = Contribution per ratio / selling price per unit
= 5.6/20
= 28%

Break-even point in terms of units = Fixed costs / Contribution per unit
= 400,000 / 5.6
= 71,429 units

Break-even point in terms of sales = Fixed costs / C/S ratio
= 400,000 / 0.28
= £1,428,571.43

Marginal costing profit statement for proposal A

££
Sales1,428,571.43
Less cost of sales:
Direct materials 457,142.85
Direct wages285,714.28
Contribution542,857.16
Less fixed costs:
Selling and distribution overheads120,000
Salesmen commission142,857.14
Profit0.00

PROPOSAL B

Workings
Reduce selling price by 5% = 20 – (5% * 20)
= £19

Increase in sales volume by 30% = 50,000 + (30% * 50,000)
= 65,000 units

Contribution = 19 – 12.4
= 6.6

C/S ratio= 6.6 / 19
= 35%

Break-even point terms of units sold= 400,000/ 6.6
= 60,606 units

Break-even point in terms of sales revenue= 400,000/0.35
= £1,142,857.14

Profit statement for proposal B
£ £
Sales1,235,000
Less cost of sales:
Direct materials416,000
Direct wages260,000
Contribution429,000
Less fixed costs:
Selling and distribution overheads120,000
Profit 29,000

PROPOSAL C
Workings

Increase in wages from £4 to £5 = 50,000 * 5
= £250,000
Wages will increase by 25%, that is, from £200,000 to £250,000, thereby increasing sales and production by 20%.

Increase in production:
Direct materials= 320,000 + (20% * 320,000)
= £384,000

Variable factory overheads= 100,000 + (20% * 120,000)
= £120,000

Increase in sales = 1,000,000 + (20% * 1,000,000)
= £1,200,000

Increase in selling and distribution overheads= 120,000 + 10,000
= £130,000

Sales volume= 1,200,000 / 20
= 60,000 units

Variable costs per unit= 754,000 / 60,000
= 12.56 per unit

Contribution per unit= 20 – 12.56
= 7.43
C/S ratio= 7.43 / 20
= 37%
Break-even point in terms of units sold= 410,000 / 7.43
= 55,182 units

Break-even point in terms of sales...

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