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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
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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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