In other words marginal costing ideas are applied

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cost expend it ure incurred). In other words, marginal costing ideas are applied. Contribution will be maximized by earning the biggest possible contribution from each unit of Limiting factor. Illustration 5 From the following data, calculate 1. Break even point expressed in amount of sales in rupees, 2. Number of units that must be sold to earn a profit of Rs. 80000 per year Rs. Sales 20 per unit Variable manufacturing cost 11 per unit Variable selling cost 3 per unit Fixed factory overhead 540000 per year Fixed selling cost 252000 per year Solution 1. Break even point = total fixed cost/ contribution per unit = 792000 / 20 14 = 792000 / 6 = 132000 units Break even sales = break even units x selling price per unit = 132000 units x Rs.20 = Rs.2640000 2. Sales units at desired profit = (fixed cost + desired profit) / contribution = (792000 + 80000) / 6 = 145333 units Illustration 6 Present the following information to show to the management: a. the marginal product cost and the contribution per unit; b. the total contribution and profit resulting from each of the following sales mixtures. Product per unit Rs. Direct materials A 10 B 9 Direct wages A 3 B 2 Fixed expenses Rs. 800 Variable expenses are allocated to products as 100% of direct wages
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160 Sales price A Rs,20 B Rs.15 Sales mixtures: a. 1000 units of product A and 2000 units of B b. 1500 units of product A and 1500 units of B c. 2000 units of product A and 1000 units of B Solution a. Marginal cost statement A B Rs. Rs. Direct materials 10 9 Direct wages 3 2 Variable overheads (100%) 3 2 Marginal cost 16 13 Sales price 20 15 Contribution 4 2 a. Product mix choice a b c Rs. Rs. Rs. I II III Total sales (1000 x 20 + 2000 x 15) = 50000 (1500x20 + 1500 x15) = 52500 (2000x20+1000 x 15) = 55000 Less. Marginal cost (1000 x 16 + 2000 x 13) = 42000 (1500x16+1500 x 13) = 43500 (2000x16+1000 x 13) = 45000 contribution 8000 9000 10000 Less : fixed costs 800 800 800 profit 7200 8200 9200 Therefore , sales mixture III will give the highest profit and as such, mixture III can be adopted. 12.3.2 PROFIT PLANNING A business concern exists with the objective of making profits, and profits are the yardstick of its success. Profit planning is therefore a part of operations planning. It is the basis of planning cash, capital expenditure, and pricing. If growth and survival of a business are to be ensured, planning becomes an absolute necessity. Marginal costing assists profit planning through computation of contribution ratio. It enables planning of future operations in such a way as to either maximize profits or maintain specified levels of profits. Normally, profits are affected by several factors such as the volume of sales, marginal cost per unit, total fixed costs, selling price, sales mix, etc. Hence, management can achieve their profit goals by varying one or more of the above variables.
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161 Illustration 7 The Delhi Mixy Co. manufactured and sold 1000 mixies last year at a price of Rs.800 each, the cost structure of a mixy is as follows Rs. Materials 200 Labour 100 Variable cost 50 Marginal cost 350 Factory overhead (fixed ) 200 Total cost 550 Profit 250 Sales price 800 Due to heavy competition, price has to be reduced to Rs.750 for the coming year. Assuming no change in costs, state the number of mixies that would have to
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