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Marginal Costing - General - Problems and Solutions Part 1
This article provides some problems and solutions on Marginal costing basics like Marginal Cost pricing, profits, inventory, contribution margin, fixed and variable expenses, break even points etc
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Problem 1: Marginal Cost Pricing
Division A transfers 100,000 units of a components to Division B each year.
The market price of the components is $25 per unit.
Division A’s variable cost is $15 per unit.
Division A’s fixed costs are $400,000 each year.
What price per unit would be credited to Division A for each component that it transfers to Division B under marginal cost pricing and under two-part tariff pricing (where the Divisions have agreed that the fixed fee will be $200,000)?
Marginal costing pricing Two-part tariff pricing
$ $
A 15 15
B 25 15
C 15 17
D 25 17
Answer:
Marginal cost will be the same as Variable cost, that is $15.
The two-part tariff transfer price per unit is the marginal cost $15. This is because the $200,000 will be transferred as a total fixed fee and not, therefore, as part of the unit transfer price.
Therefore, the answer is A.
Problem 2: Marginal Cost Profits
Summary results for Y Limited for March are show below.
$000 Units
Sales revenue 820
Variable production costs 300
Variable selling costs 105
Fixed production costs 180
Fixed selling costs 110
Production in March 1,000
Opening inventory 0
Closing inventory 150
Using marginal costing, the profit for March was
A $170,000
B $185,750
C $197,000
D $229,250
Answer: A
Workings
Closing Inventory
Variable production costs $300,000
Production in March 1,000 units
Closing inventory = $300,000 / 1,000 = $300 per unit.
Closing inventory 150 units
Closing inventory in value = $300 x 150 units
= $45,000
$
Turnover 820,000 (A)
Cost of production relevant to the Sales = Production – Closing inventory cost
for the month
Production costs ($300,000 – $45,000) 255,000 (B)
Other costs
Variable selling costs 105,000
Fixed production costs 180,000
Fixed selling costs 110,000
--------------- 395,000 (C)
------------
Total Cost (D) 650,000 (B + C)
Profit (A – D) 170,000
Problem 3: Marginal Cost Inventory
The following data, relating to a manufacturing company, are given for sub-questions A and B below.
At the beginning of September there was no inventory. During September 2,000 units of product X were produced, but only 1,750 units were sold. The financial data for product X for September were as follow:
$
Materials 40,000
Labor 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Variable selling costs 6,000
Fixed selling costs 19,300
-----------------
Total costs for X for September 109,800
--------------
A The value of inventory of X at 30 September using a marginal costing approach is
a) $6,575
b) $7,750
c) $8,500
d) $10,562
Answer: B
Variable Production Cost = Materials cost + Labor cost + Variable production Overheads cost
= $40,000 + $12,600 + $9,400 = $62,000
During September 2,000 units of product X were produced.
Variable production cost per unit = $62,000 / 2,000 units = $31
1,750 units were sold
No. of units in inventory = Production units – Sales units
= 2,000 – 1,750 = 250 units
Marginal cost of inventory = 250 units x $31 = $7,750
Otherwise
During September 2,000 units of product X were produced, but only 1,750 units were sold.
The inventory is production 2,000 units – sales 1,750 units.
i.e. 250 units - 1/8th production is in inventory.
Marginal cost of inventory is an approximation of variable production cost of $62,000.
1/8th production in inventory = $7,750.
B. The value of inventory X at 30 September using a throughput accounting approach is
a) $5,000
b) $6,175
c) $6,575
d) $13,725
Answer: A.
In Throughput approach, values of inventory is calculated at Direct Materials cost.
Direct Materials cost = $40,000
Inventory cost in Throughput approach is $40,000 x 250/2000 = 5,000
Otherwise
Throughput approach values inventory at direct materials cost.
i.e. 1/8th of $40,000 = $5,000.
Problem 4: Profit/Volume Chart
If the budgeted fixed costs increase, the gradient of the line plotted on the budgeted profit/Volume (P/V) chart will
a) increase.
b) decrease.
c) not change
d) become curvi-linear.
Answer: C
Problem 5: Contribution Margin & Break Even points
Use this information to answer questions A through C:
$
Selling Price per unit 17
Fixed Expenses
Selling and Administrative 130,000
Interest Expenses 10,000
Variable Expenses
Cost of Goods Sold 4
Selling and Administrative 3
Question A:
What is the company’s contribution margin?
$10 $13 $14
Answer: $10
Workings:
Contribution Margin = Sales - Variable Expenses
$ ` $
Selling Price per unit 17
Variable Expenses
Costs of Goods Sold 4
Selling Administrative 3
Total 7
Contribution Margin 10
Per unit
Question B:
What is the Break-Even point in units?
10,000 14,000 20,000
Answer: 14,000 units.
Workings:
Break Even Point = Total Fixed Expenses
(in Units) Contribution margin per unit
Fixed Expenses $
Selling and Administrative 130,000
Interest Expenses 10,000
-------------------
Total 140,000
---------------
i.e. 140,000 / 10 = 14,000 units.
Question C:
If the company wants to earn a profit of $42,000 instead of breaking even, what is the number of units the company must sell?
14,000 18,200 26,000
Answer: 18,200 units.
Workings:
Total margin required
The number of units the company must sell = ------------------------------------
Contribution margin in units.
Total Margin required = Fixed Expenses + Required Profit
$
Fixed Expenses 140,000
Required profit 42,000
Total Margin required 182,000
The number of units the company must sell = 182,000 / 10 = 18,200 units
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