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

 

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

 

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

  • You can enable syntax highlighting of source code with the following tags: <code>. Beside the tag style "<foo>" it is also possible to use "[foo]".
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
  • Search Engines will index and follow ONLY links to allowed domains.

More information about formatting options

Marginal Costing - General - Problems and Solutions Part 1 | Our website now yours! - Currenlty Java focussed.

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

 

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

 

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

  • You can enable syntax highlighting of source code with the following tags: <code>. Beside the tag style "<foo>" it is also possible to use "[foo]".
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
  • Search Engines will index and follow ONLY links to allowed domains.

More information about formatting options