Marginal Costing - Accepting additional orders, Exploring additional markets and Exporting
Marginal Costing - Accepting additional orders, Exploring additional markets and Exporting
This article is part of a tutorial.
Tutorial Index page - Marginal Costing Product Profitability
Marginal Costing- accepting, exploring additional orders and markets
Problem 1:
The cost sheet of a product is given as under:
| $ | ||
|---|---|---|
| Direct Materials | 5.00 |
|
| Direct Wages | 3.00 |
|
| Factory Overheads |
$ |
|
| Fixed | 0.50 |
|
| Variable | 0.50 |
1.00 |
| Administrative Expenses | 0.75 |
|
| Selling and Distribution Overheads | ||
| Fixed | 0.25 |
|
| Variable | 0.50 |
0.75 |
----------- |
||
10.50 |
||
----------- |
The selling price per unit is $ 12.
The above figures are for an output of 50,000 units, the capacity for the firm is 65,000 units. A foreign customer is desirous of buying 15,000 units at a price of $10 per unit.
Advice the manufactures whether the order should be accepted.
What will be your advice if the order were from a local merchant?
Answer
Marginal cost or additional cost for additional 15,000 units at a selling price of $10 per unit.
| Per Unit | For 15,000 units | |
|---|---|---|
$ |
$ |
|
| Direct Materials | 5.00 |
75,000 |
| Direct Wages | 3.00 |
45,000 |
--------------- |
---------------- |
|
| Prime Cost | 8.00 |
120,000 |
--------------- |
---------------- |
|
| Variable Overheads: | ||
| Factory | 0.50 |
7,500 |
| Selling and Distribution | 0.50 |
7,500 |
--------------- |
---------------- |
|
| Marginal Cost | 9.00 |
135,000 |
| Sales | 10.00 |
150,000 |
---------------- |
---------------- |
|
| Contribution | 1.00 |
15,000 |
The order from the foreign customer will give an additional contribution of $ 15,000.
Hence, the order should be accepted.
Additional contribution of $ 15,000 will increase the profit by this amount because fixed expenses have already been met from the internal market.
The order from the local merchant should not be accepted at a price of $ 10 which is less than normal price of $ 12.
This price will affect relationship with other customers and there will be a general tendency of reduction in the price.
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