Marginal Costing - General - Problems and Solutions Part 2

This article is an additional excercise providing you with more problems on contribution margin, controllable and segment margins, P/V ratio, sales, commision, volume, break even points, depreciation, expenses- Fixed, variable etc and their appropriates solutions

Let us solve some more problems.

Contribution Margin, break even point and revenue

Problem 6:

Use this information to answer questions A through C:

   $

Fixed Expenses

Rent 24,000

Salaries 40,000

Depreciation 13,000

Variable Expenses

Cost of Goods sold 58% of sales

Supplies 7% of sales

Sales Commission 5% of sales

 

Question A:

What is the company’s contribution margin ratio?

30% 70% cannot be determined

Answer is 30%

 

Workings:

The contribution margin   = Sales -    Variable expenses.

The contribution margin ratio = Contribution margin expressed as a

percentage of sales or Revenue.

Variable Expenses

Cost of Goods sold 58% of sales

Supplies   7% of sales

Sales Commission  5% of sales

---------------------

Total 70% of sales

-----------------

The contribution margin ratio   =   100% - 70%   =   30%

 

Question B:

What is the break-even point in dollars?

$77,000 $110,000 256,667

Answer is $256,667

 

Workings:

Break Even Point  (in dollars) =  Total Fixed Expenses

      ------------------------------------

Contribution margin ratio

   $

Fixed Expenses

Rent 24,000

Salaries 40,000

Depreciation 13,000

      ---------------

Total 77,000

      ------------

The contribution margin ratio   =   30%

The breakeven point in dollars   =   77,000 / 30%   =   256,667.

 

Question C:

If the company wants to earn a profit of $35,000 instead of breaking even, what is the amount of sales or revenue dollars the company must achieve?

$112,000 $145,000 $373,333

Answer is 373,333

 

Workings:

To arrive at the required sales = (Fixed expenses  +  Required profit)

     -------------------------------------------------------------

Contribution margin ratio.

   $

Fixed Expenses

Rent 24,000

Salaries 40,000

Depreciation 13,000

     ----------------

Total 77,000

Required Profit 35,000

     ----------------

The required margin        112,000

The contribution margin ratio =  30%

The required sales =  $112,000 / 30% = $373,333

 

Controllable Contribution margin and segment margin

Problem 7:    

The following information pertains to the Zigma Division of Computer Products

$

Net Sales            400,000

Controllable fixed costs traceable to the division     100,000

Uncontrollable fixed costs traceable to the division       45,000

Variable Costs:

    Cost of goods sold       30,000

    Selling and administrative       70,000

Allocated corporate overhead        25,000

Compute Zigma’s contribution margin, controllable contribution margin, and segment margin.

Answer:

Zigma Division

Contribution Income Statement

   $     $

Net Sales 400,000

Less:   Variable Cost

Cost of goods sold 30,000

Selling and administrative 70,000

    ----------------

Total 100,000

       ------------

Contribution Margin 300,000

 

Less: Controllable Fixed Costs 100,000

      ---------------

Controllable Contribution Margin 200,000

 

Less: Uncontrollable Fixed Costs  45,000

       ---------------

Segment Margin 155,000

       ------------

Note:  The allocated corporate overhead would not be charged against the segment margin.

 

Total direct materials and labor from costs incurred

Problem 8:    

Elango Steels produces standing-seam metal roofing and incurred the following costs for the year just ended. 

$

Materials and Supplies

Steel 2,200,000

Machine Lubricants     12,000

Wages and Salaries

Machine Operators 1,400,000

Production Supervisors      240,000

Maintenance Personnel              70,000

Other Factory Overhead

Utilities     70,000

Depreciation     45,000

Calculate:

a.    Total direct materials used.

b.    Total direct labor.

 

Answer:

(a)   Total direct materials - $2,200,000   (Only Steel included)

(b)   Total direct labor - $1,400,000 (Only Machine Operators included)

 

 

Types of Costs

 

Problem 9:    

Determine the missing amounts in each of the independent cases that follow.

 

Case Units sold Sales     Variable   Contribution Fixed Income

                Cost Margin per unit     Operating cost

$                $ $   $           $

 

A  20,000 265,000            ? ?           105,000           (10,000)

B  21,000         ?           25,000 10    ? 50,000

C      ? 140,000            ?   3        42,000 30,000

 

Answer:

Case A:

Contribution margin per unit:   (Fixed costs + Operating income) 

    -----------------------------------------------

                 Units sold 

= ($105,000 - $10,000)

    -------------------------------

      20,000 

=     $95,000

      ------------

     20,000

= $4.75

 

Contribution margin = Units sold  x  Contribution margin per unit

= 20,000 units  x  $4.75

= $95,000

 

Variable costs:     Sales - Contribution margin 

=   $265,000 - $95,000 

= $170,000

 

Case B:

 

Contribution margin = Units sold  x  Contribution margin per unit

= 21,000 units  x  $10

= $210,000

 

Contribution margin  -  Fixed costs = Operating income

 

$210,000  -  Fixed costs = $50,000

Fixed costs = $210,000  -  $50,000 

= $160,000

 

Sales = variable costs + fixed costs + operating income

= $25,000 + $160,000 + $50,000

     = $235,000

 

Case C:

Contribution Margin = Fixed Cost  +  Income

= $42,000  +  $30,000

= $72,000

 

Units sold: = Contribution margin / Contribution margin per unit 

  = $72,000  units

       -------------

     $3

  = 24,000 units

 

 

Variable costs: = Sales - Contribution margin   

     = $140,000 - $72,000 

= $68,000

 

Case Units sold Sales   Variable  Contribution Fixed Income

        Cost Margin per unit      Operating cost

  $            $ $      $         $

--------------------------------------------------------------------------------------------------------------

A  20,000 265,000     170,000         4.75           105,000         (10,000)

B  21,000 235,000       25,000 10           160,000 50,000

C  24,000 140,000       68,000  3   42,000 30,000

--------------------------------------------------------------------------------------------------------------

 

 

Break even point, sales volume and P/V ratio

Problem 10:

 

Two business, Y Ltd and Z Ltd  sell the same type of product in the same type of market.

Their budgeted profit and loss accounts for the coming year are as follows;

    Y Ltd   Z Ltd

      $            $

Sales 150,000       150,000

Less: Variable Costs 120,000 100,000

Fixed Costs     15,000  135,000     35,000        135,000

Budgeted Net Profit  15,000    15,000

 

You are required to:

1. Calculate the breakeven point of each business

2. Calculate the sales volume at which each of businesses will earn $ 5,000 profit

3. State which business is likely to earn greater profit in conditions of:

a. Heavy demand for the product

b. Low demand for the product and briefly give your reasons

 

Answer

For Question 1)

P/V Ratio = Contribution

            -------------------

               Sales

= (Fixed Expenses  +  Profit)

       --------------------------------------

          Sales

 

P/V Ratio of Y Ltd = (15,000  +  15000) = 30,000

      -----------------------------            ------------

      150,000 150,000

= 1/5 or 20%

 

 

P/V Ratio of Z Ltd = (35,000  +  15000) = 50,000

     ------------------------------            ------------

      150,000 150,000

= 1/3 or 33.33%

 

 

Break Even Point = Fixed Expenses

      ------------------------

  P/V Ratio

 

B.E.P. of Y Ltd = 15,000 = 15,000 x 5/1 = $   75,000

----------  

   1/5

 

B.E.P. of Z Ltd = 35,000 = 35,000 x 3/1 = $ 105,000

----------

     1/3

 

For Question 2)

 

The sales volume at which each of businesses will earn a certain profit

= (Fixed Expenses  +  Desired Profit)

------------------------------------------------

        P/V Ratio

When profit is $ 5,000,

Sales Volume of Y Ltd = (15,000 + 5,000) = 20,000 x 5/1

-------------------------

1/5

= $ 100,000

 

Sales Volume of Z Ltd = (35,000 + 5,000) = 40,000 x 3/1

------------------------

1/3

= $ 120,000

 

For Question 3 a)

In conditions of heavy demand, a concern with larger P/V ratio can earn greater profits because of greater contribution. 

Thus, Z Ltd is likely to earn greater profit.

 

For Question 3 b)

In conditions of low demand, a concern with lower breakeven point is likely to earn more profits because it will start earning profits at lower level of sales.

 In this case, Y Ltd., will  start earning profits when its sales reach the level of $ 75,000, where as Z Ltd., will start earning profits when its sales reach the level of $ 105,000. 

Therefore, in case of low demands, Break Even Point should be reached as earlier as possible so that the company may start earning profits.

 

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Marginal Costing - General - Problems and Solutions Part 2 | Our website now yours! - Currenlty Java focussed.

Marginal Costing - General - Problems and Solutions Part 2

This article is an additional excercise providing you with more problems on contribution margin, controllable and segment margins, P/V ratio, sales, commision, volume, break even points, depreciation, expenses- Fixed, variable etc and their appropriates solutions

Let us solve some more problems.

Contribution Margin, break even point and revenue

Problem 6:

Use this information to answer questions A through C:

   $

Fixed Expenses

Rent 24,000

Salaries 40,000

Depreciation 13,000

Variable Expenses

Cost of Goods sold 58% of sales

Supplies 7% of sales

Sales Commission 5% of sales

 

Question A:

What is the company’s contribution margin ratio?

30% 70% cannot be determined

Answer is 30%

 

Workings:

The contribution margin   = Sales -    Variable expenses.

The contribution margin ratio = Contribution margin expressed as a

percentage of sales or Revenue.

Variable Expenses

Cost of Goods sold 58% of sales

Supplies   7% of sales

Sales Commission  5% of sales

---------------------

Total 70% of sales

-----------------

The contribution margin ratio   =   100% - 70%   =   30%

 

Question B:

What is the break-even point in dollars?

$77,000 $110,000 256,667

Answer is $256,667

 

Workings:

Break Even Point  (in dollars) =  Total Fixed Expenses

      ------------------------------------

Contribution margin ratio

   $

Fixed Expenses

Rent 24,000

Salaries 40,000

Depreciation 13,000

      ---------------

Total 77,000

      ------------

The contribution margin ratio   =   30%

The breakeven point in dollars   =   77,000 / 30%   =   256,667.

 

Question C:

If the company wants to earn a profit of $35,000 instead of breaking even, what is the amount of sales or revenue dollars the company must achieve?

$112,000 $145,000 $373,333

Answer is 373,333

 

Workings:

To arrive at the required sales = (Fixed expenses  +  Required profit)

     -------------------------------------------------------------

Contribution margin ratio.

   $

Fixed Expenses

Rent 24,000

Salaries 40,000

Depreciation 13,000

     ----------------

Total 77,000

Required Profit 35,000

     ----------------

The required margin        112,000

The contribution margin ratio =  30%

The required sales =  $112,000 / 30% = $373,333

 

Controllable Contribution margin and segment margin

Problem 7:    

The following information pertains to the Zigma Division of Computer Products

$

Net Sales            400,000

Controllable fixed costs traceable to the division     100,000

Uncontrollable fixed costs traceable to the division       45,000

Variable Costs:

    Cost of goods sold       30,000

    Selling and administrative       70,000

Allocated corporate overhead        25,000

Compute Zigma’s contribution margin, controllable contribution margin, and segment margin.

Answer:

Zigma Division

Contribution Income Statement

   $     $

Net Sales 400,000

Less:   Variable Cost

Cost of goods sold 30,000

Selling and administrative 70,000

    ----------------

Total 100,000

       ------------

Contribution Margin 300,000

 

Less: Controllable Fixed Costs 100,000

      ---------------

Controllable Contribution Margin 200,000

 

Less: Uncontrollable Fixed Costs  45,000

       ---------------

Segment Margin 155,000

       ------------

Note:  The allocated corporate overhead would not be charged against the segment margin.

 

Total direct materials and labor from costs incurred

Problem 8:    

Elango Steels produces standing-seam metal roofing and incurred the following costs for the year just ended. 

$

Materials and Supplies

Steel 2,200,000

Machine Lubricants     12,000

Wages and Salaries

Machine Operators 1,400,000

Production Supervisors      240,000

Maintenance Personnel              70,000

Other Factory Overhead

Utilities     70,000

Depreciation     45,000

Calculate:

a.    Total direct materials used.

b.    Total direct labor.

 

Answer:

(a)   Total direct materials - $2,200,000   (Only Steel included)

(b)   Total direct labor - $1,400,000 (Only Machine Operators included)

 

 

Types of Costs

 

Problem 9:    

Determine the missing amounts in each of the independent cases that follow.

 

Case Units sold Sales     Variable   Contribution Fixed Income

                Cost Margin per unit     Operating cost

$                $ $   $           $

 

A  20,000 265,000            ? ?           105,000           (10,000)

B  21,000         ?           25,000 10    ? 50,000

C      ? 140,000            ?   3        42,000 30,000

 

Answer:

Case A:

Contribution margin per unit:   (Fixed costs + Operating income) 

    -----------------------------------------------

                 Units sold 

= ($105,000 - $10,000)

    -------------------------------

      20,000 

=     $95,000

      ------------

     20,000

= $4.75

 

Contribution margin = Units sold  x  Contribution margin per unit

= 20,000 units  x  $4.75

= $95,000

 

Variable costs:     Sales - Contribution margin 

=   $265,000 - $95,000 

= $170,000

 

Case B:

 

Contribution margin = Units sold  x  Contribution margin per unit

= 21,000 units  x  $10

= $210,000

 

Contribution margin  -  Fixed costs = Operating income

 

$210,000  -  Fixed costs = $50,000

Fixed costs = $210,000  -  $50,000 

= $160,000

 

Sales = variable costs + fixed costs + operating income

= $25,000 + $160,000 + $50,000

     = $235,000

 

Case C:

Contribution Margin = Fixed Cost  +  Income

= $42,000  +  $30,000

= $72,000

 

Units sold: = Contribution margin / Contribution margin per unit 

  = $72,000  units

       -------------

     $3

  = 24,000 units

 

 

Variable costs: = Sales - Contribution margin   

     = $140,000 - $72,000 

= $68,000

 

Case Units sold Sales   Variable  Contribution Fixed Income

        Cost Margin per unit      Operating cost

  $            $ $      $         $

--------------------------------------------------------------------------------------------------------------

A  20,000 265,000     170,000         4.75           105,000         (10,000)

B  21,000 235,000       25,000 10           160,000 50,000

C  24,000 140,000       68,000  3   42,000 30,000

--------------------------------------------------------------------------------------------------------------

 

 

Break even point, sales volume and P/V ratio

Problem 10:

 

Two business, Y Ltd and Z Ltd  sell the same type of product in the same type of market.

Their budgeted profit and loss accounts for the coming year are as follows;

    Y Ltd   Z Ltd

      $            $

Sales 150,000       150,000

Less: Variable Costs 120,000 100,000

Fixed Costs     15,000  135,000     35,000        135,000

Budgeted Net Profit  15,000    15,000

 

You are required to:

1. Calculate the breakeven point of each business

2. Calculate the sales volume at which each of businesses will earn $ 5,000 profit

3. State which business is likely to earn greater profit in conditions of:

a. Heavy demand for the product

b. Low demand for the product and briefly give your reasons

 

Answer

For Question 1)

P/V Ratio = Contribution

            -------------------

               Sales

= (Fixed Expenses  +  Profit)

       --------------------------------------

          Sales

 

P/V Ratio of Y Ltd = (15,000  +  15000) = 30,000

      -----------------------------            ------------

      150,000 150,000

= 1/5 or 20%

 

 

P/V Ratio of Z Ltd = (35,000  +  15000) = 50,000

     ------------------------------            ------------

      150,000 150,000

= 1/3 or 33.33%

 

 

Break Even Point = Fixed Expenses

      ------------------------

  P/V Ratio

 

B.E.P. of Y Ltd = 15,000 = 15,000 x 5/1 = $   75,000

----------  

   1/5

 

B.E.P. of Z Ltd = 35,000 = 35,000 x 3/1 = $ 105,000

----------

     1/3

 

For Question 2)

 

The sales volume at which each of businesses will earn a certain profit

= (Fixed Expenses  +  Desired Profit)

------------------------------------------------

        P/V Ratio

When profit is $ 5,000,

Sales Volume of Y Ltd = (15,000 + 5,000) = 20,000 x 5/1

-------------------------

1/5

= $ 100,000

 

Sales Volume of Z Ltd = (35,000 + 5,000) = 40,000 x 3/1

------------------------

1/3

= $ 120,000

 

For Question 3 a)

In conditions of heavy demand, a concern with larger P/V ratio can earn greater profits because of greater contribution. 

Thus, Z Ltd is likely to earn greater profit.

 

For Question 3 b)

In conditions of low demand, a concern with lower breakeven point is likely to earn more profits because it will start earning profits at lower level of sales.

 In this case, Y Ltd., will  start earning profits when its sales reach the level of $ 75,000, where as Z Ltd., will start earning profits when its sales reach the level of $ 105,000. 

Therefore, in case of low demands, Break Even Point should be reached as earlier as possible so that the company may start earning profits.

 

Use the links below to see other articles in the same category.
This article is part of a book. Use the below links to navigate through the book.

Comments

Post new comment

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