Marginal Costing – Profitability of a Product – Problems and Solutions
Marginal Costing – Profitability of a Product – Problems and Solutions
This article is part of a tutorial.
Tutorial Index page - Marginal Costing Product Profitability
Profitability of a Product
Problem 1:
The management of a company considers that product Y, one of its three main lines, is not profitable as the other two with the result that no particular efforts are being made to push its sales. The selling prices and cost of the three products are:
| Direct Labour | |||||
|---|---|---|---|---|---|
| Product | Selling Price | Direct Material | Dept. A | Dept. B | Dept.C |
$ |
$ |
$ |
$ |
$ |
|
| X | 68 |
10 |
8 |
2 |
2 |
| Y | 58 |
6 |
2 |
8 |
2 |
| Z | 64 |
8 |
2 |
2 |
8 |
Overhead rates for each department per $ of direct labor are as follows:
| Dept. A | Dept. B | Dept.C | |
|---|---|---|---|
$ |
$ |
$ |
|
| Variable Overhead | 1.20 |
0.40 |
1.00 |
| Fixed Overhead | 1.20 |
2.00 |
1.40 |
------- |
------- |
-------- |
|
| Total | 2.40 |
2.40 |
2.40 |
------- |
------- |
-------- |
What advice would you give to the management about the profitability of product Y? Give reasons.
Answer
Labor cost for each product
| Direct Labour | ||||
|---|---|---|---|---|
| Product | Dept. A | Dept. B | Dept.C | Total |
$ |
$ |
$ |
$ |
|
| X | 8 |
2 |
2 |
12 |
| Y | 2 |
8 |
2 |
12 |
| Z | 2 |
2 |
8 |
12 |
| Total | 12 |
12 |
12 |
|
| Variable | ||||
| Overhead rates per $ of direct labor | 1.2 |
0.4 |
1.0 |
|
| Variable over head | 14.4 |
4.8 |
12.0 |
|
Comparative Statement of Profitability
| Products | |||
|---|---|---|---|
| Particulars | X | Y | Z |
$ |
$ |
$ |
|
| Direct Materials | 10.00 |
6.00 |
8.00 |
| Direct Labor | 12.00 |
12.00 |
12.00 |
| Variable Overhead | 14.40 |
4.80 |
12.00 |
| Total | ---------- |
-------- |
-------- |
| Marginal Cost | 36.40 |
22.80 |
32.00 |
| Contribution (Selling Price - Marginal Cost) | 31.60 |
35.20 |
32.00 |
-------- |
-------- |
-------- |
|
| Selling Price | 68.00 |
58.00 |
64.00 |
| P/V Ration ((Contribution/Selling Price) *100) | 46.47% |
60.69% |
50.00% |
Product Y is the most profitable product because P/V ratio is the highest. Thus, efforts should be made to push its sales.
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