Marginal Costing - General - Problems and Solutions Part 1
Marginal Costing - General - Problems and Solutions Part 1
This article is part of a tutorial.
Tutorial Index page - Marginal Costing Basics
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 traffic 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
| 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 * 150 units |
= |
$45,000 |
|
$ |
||
| Turnover | 820, 000 (A) |
|
| Cost of production relevant to the Sales | = |
Production - Closing inevntory 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 |
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