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Marginal Costing Ivor Ltd produces a single product - Leaving Cert Accounting - Question 8 - 2011
Question 8
Marginal Costing Ivor Ltd produces a single product. The company’s profit and loss account for the year ended 31/12/2010, during which 90,000 units were produced an... show full transcript
Worked Solution & Example Answer:Marginal Costing Ivor Ltd produces a single product - Leaving Cert Accounting - Question 8 - 2011
Step 1
The company’s break-even point and margin of safety.
Answer
To calculate the break-even point, we first need to determine the contribution per unit (CPU).
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Calculate Total Fixed Costs: Fixed Costs include: Selling Expenses (€105,000) + Administration Expenses (€130,000) = €235,000.
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Calculate Variable Costs per Unit: Total Variable Costs = Materials + Direct Labour + Factory Overheads (40%) = €390,000 + €236,000 + (0.4 × €82,000) = €390,000 + €236,000 + €32,800 = €658,800. Variable Cost per Unit = €658,800 / 90,000 units = €7.32.
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Sales Price per Unit: Sales Price per unit = Total Sales / Total Units Sold = €1,170,000 / 90,000 = €13.
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Calculate Contribution per Unit (CPU): Contribution = Sales Price - Variable Cost = €13 - €7.32 = €5.68.
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Break-even Point in Units: Break-even Point = Total Fixed Costs / Contribution per Unit = €235,000 / €5.68 ≈ 41,376 units.
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Margin of Safety: Margin of Safety = Budgeted Sales - Break-even Point = 90,000 - 41,376 = 48,624 units.
Step 2
The number of units that must be sold in 2011 if the company is to increase its net profit by 20% over the 2010 figure.
Answer
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Calculate Target Net Profit for 2011: Target Net Profit = 2010 Net Profit × 1.2 = €227,000 × 1.2 = €272,400.
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Required Units to be Sold to Achieve This Profit: Total Required Profit = Target Net Profit + Total Fixed Costs = €272,400 + €235,000 = €507,400.
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Required Contribution to Achieve This Profit: Required Units = Total Required Profit / Contribution per Unit = €507,400 / €5.68 = approximately 89,199 units.
Step 3
The profit the company would make in 2011 if it reduced its selling price to €11.
Answer
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Calculate New Sales Figures at New Price: New Sales = 110,000 units × €11 = €1,210,000.
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Variable Costs for New Output: Variable Costs per unit = €7.32, thus for 110,000 units = €7.32 × 110,000 = €805,200.
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Calculate Total Fixed Costs (unchanged): Fixed Costs = €235,000.
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Calculate Contribution: Contribution = Sales - Variable Costs - Fixed Costs = €1,210,000 - €805,200 - €235,000 = €169,800.
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Profit Calculation: Thereby, Profit = €169,800.
Step 4
The selling price to be charged.
Answer
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Let (P) be the Selling Price: Profit = (Sales - Variable Costs) - Fixed Costs Let Sales = N × P Therefore, Profit = N × P - Variable Costs - Fixed Costs. For given fixed costs and variable costs, we can rearrange the expression: Profit = N × P - Variable Cost × N - Fixed Costs
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Example using Actual Figures: Setting Profit at €38,000 for 90,000 units, solve for P: 90,000P - 90,000×7.32 - 235,000 >= 38,000 to find P.
Step 5
Explain what is meant by a step fixed cost.
Answer
A step fixed cost refers to costs that remain fixed over certain levels of production or consumption up to a specified threshold. Beyond this threshold, the cost will increase to a new fixed level. For example, rent can remain constant until a business reaches a certain level of output, at which point the rent may increase. These fixed costs typically do not vary with production levels within the relevant range but will change once activity surpasses a certain threshold.