Marginal Costing - Alternative course of Action– Problems and Solutions

In this article, we will see the alternative course of action in marginal costing that can be taken giving the right kind of product to attain the maximum profit margin with analysing the given costing details- direct materials, labor, expenses- variable and fixed, total cost, selling price, units, contribution, margin cost etc.

Marginal Costing - Alternative course of Action– Problems and Solutions

Posted Tue, 03/23/2010 - 22:53 by administrator

Marginal Costing - Alternative Cource of Action

 

Problem 1:

The cost per unit of the three products A, B and C of a concern is as follows:

  A B C
 
$
$
$
Direct Materials
10
8
9
Direct Labor
6
7
6
Variable Expenses
4
5
3
Fixed Expenses
3
3
2
 
-----------
-----------
----------
Total
23
23
20
Profit
8
7
6
 
-----------
-----------
----------
Selling Price
32
30
26
 
------------
-----------
----------
Number of Units produced
10,000
5,000
8,000

Production arrangements are such that if one product is given up, the production of the others can be raised by 50%. The directors propose that C should be given up because the contribution in that case is lowest. Do you agree?

 

Solution

Fixed expenses under the present arrangement are:

        $
Product A
-
 10,000 units @ $  3 per unit
=
30,000
Product B
-
 5,000 units @ $  3 per unit
=
15,000
Product C
-
 8,000 units @ $  2 per unit
=
16,000
     
----------
Total Fixed Cost    
61,000
     
----------

Fixed expenses will remain same even though production arrangement may be changed.

Contribution per unit = Selling Price  -  Marginal Cost

  A B C
 
$
$
$
Selling Price
32
30
26
       
Variable Cost:      
Direct Materials
10
8
9
Direct Cost
6
7
6
Variable Expenses
4
5
3
 
----------
----------
----------
Total - Variable Cost
20
20
18
 
Contribution per cost
12
10
8
 
----------
----------
----------

There can be three production arrangements as follows:

Case 1:

1) If product A is given up, the production of B and C will be increased by 50%.

  B C Total
Existing output
5,000
8,000
To be increased by 50% of existing output
2,500
4,000
 
----------
---------
Increased Output
7,500
12,000
 
----------
---------
 
 
$
$
$
Contribution per unit
10
8
Contribution in value
75,000
96,000
171,000
Less: Fixed Expenses
61,000
 
---------
Total Profit
110,000
 
---------

 

Case 2:

2) If product B is given up, the production of A and C will be increased by 50%.

  A C Total
Existing output
10,000
8,000
To be increased by 50% of existing output
5,000
4,000
 
----------
---------
Increased Output
15,000
12,000
 
----------
---------
 
 
$
$
$
Contribution per unit
12
8
Contribution in value
180,000
96,000
276,000
Less: Fixed Expenses
61,000
 
---------
Total Profit
215,000
 
---------

 

Case 3:

3) If product C is given up, the production of A and B will be increased by 50%.

  A B Total
Existing output
10,000
5,000
To be increased by 50% of existing output
5,000
2,500
 
----------
---------
Increased Output
15,000
7,500
 
----------
---------
 
 
$
$
$
Contribution per unit
12
10
Contribution in value
180,000
75,000
255,000
Less: Fixed Expenses
61,000
 
---------
Total Profit
194,000
 
---------

From the above analysis it is clear that the profit is the maximum when product B is given up. Therefore, we do not agree with the directors that C should be given up and recommend that product B should be given up in order to have the maximum profit.

 

 

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