Marginal Costing Sheffin Ltd manufactures a single product - Leaving Cert Accounting - Question 8 - 2018

To calculate the variable cost per unit, divide the total variable costs by the total number of units:

$ext{Variable Cost} = \frac{440,000}{44,000} = 10 \text{€ per unit}$

Contribution per unit can be calculated as follows:

$ext{Contribution} = ext{Selling Price} - ext{Variable Cost} = 20 - 10 = 10 \text{€ per unit}$

The break-even point in units can be found using the formula:

$ext{Break-even Point (B.E.P)} = \frac{\text{Fixed Costs}}{\text{Contribution per unit}} = \frac{141,500}{10} = 14,150 \text{ units}$

To find the sales value at this break-even point:

$\text{Sales Value} = \text{B.E.P} \times \text{Selling Price} = 14,150 \times 20 = 283,000 €$

The margin of safety can be calculated as follows:

1. Margin of Safety in units:

   $\text{Margin of Safety (units)} = \text{Budgeted Sales} - \text{B.E.P} = 30,000 - 14,150 = 15,850 \text{ units}$

2. Margin of Safety in sales value:

   $\text{Sales value} = \text{Margin of Safety (units)} \times \text{Selling Price} = 15,850 \times 20 = 317,000 €$

The marginal costing statement would be prepared as follows:

• Sales at new price:

  Selling Price = 20 - 1 = 19 €

  New sales volume = 30,000 × 1.05 = 31,500 units

  Sales = 31,500 × 19 = 598,500 €

• Variable Costs:

  Variable Cost = 10 €

  Total Variable Costs = 31,500 × 10 = 315,000 €

• Contribution:

  Contribution = Sales - Variable Costs = 598,500 - 315,000 = 283,500 €

• Fixed Costs: Fixed Costs remain unchanged: 141,500 €

• Net Profit:

  Net Profit = Contribution - Fixed Costs = 283,500 - 141,500 = 142,000 €

Fixed Cost refers to costs that do not change with the level of production or sales. They remain constant regardless of the output level. Examples include:

• Rent
• Depreciation
• Supervisor's salary
• Insurance

For instance, rent paid for the factory space is a fixed cost, as it remains the same regardless of how much product is manufactured.