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Marginal Costing – Profitability of a Product – Problems and Answers
This article gives sample problems that deal with the profitability of a product and how it can be managed with the fixed and variable overhead rates and with the given selling price and materials considered.
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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:
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Direct Labor
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Product Selling Direct Dept. A Dept. B Dept. C
Price Material
$ $ $ $ $
X 68 10 8 2 2
Y 58 6 2 8 2
Z 64 8 2 2 8
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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.
Solution
Labor cost for each product
Direct Labor
---------------------------
Product Dept. A Dept. B Dept. C Total
$ $ $ $
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X 8 2 2 12
Y 2 8 2 12
Z 2 2 8 12
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Total direct Labor cost 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
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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
-------- -------- ---------
Marginal Cost 36.40 22.80 32.00
Contribution 31.60 35.20 32.00
(Selling Price - Marginal Cost) ------- -------- --------
Selling Price 68.00 58.00 64.00
P/V Ratio ( Contribution x 100) 46.47% 60.69% 50.00%
Selling Price
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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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