Books
Browse Article Categories
User login
Featured Gallery Photo
DSCF0459x
Active forum topics
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.
Table of Contents [hide]
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 Cost 23 23 20
Profit 9 _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 Labor 6 7 6
Variable Expenses 4 5 3
Total – Variable Cost 20 20 18
Contribution per unit 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 55,000
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.
Related Articles
Use the links below to see other articles in the same category.
Tags:
Management Accounting
Tags:
Marginal Costing This article is part of a book. Use the below links to navigate through the book.
Comments
this is very useful and
this is very useful and understanding
This is awesome
This is awesome
Post new comment