Short-run decision making and CVP Analysis. Marginal costing and contribution. When using marginal costing, managers will often consider the size of the contribution when making production decision Contribution is the difference between sales revenue and variable costs
A special machine is used to manufacture the three products and
there are only 15,000 machine hours available.
Product X uses 20 machine hours per unit.
Product Y uses 5 machine hours per unit.
Product Z uses 2 machine hours per unit.
Which product should be manufactured first?
A company makes product P. The cost of the current production level of 50,000 units are:
Direct materials £2.5
Direct wages £1.25
Variable overheads £1.75
Fixed cost £ 3.50
Total cost of production £9.00
Component P could be bought in for £ 7.75 and, if so, the production capacity utilized at present would be unused.
Assuming that there are no overriding technical considerations, should P be bought or manufactured?
X Y Z Total
Rs Rs Rs Rs
Sales 32,000 50,000 45,000 127,000
Total costs 36,000 38,000 34,000108,000
Net profit/Loss (4000) 12,000 11,00019,000
Contribution product Y 24,667
Contribution product Z 22,333
Total Contribution 47,000
Less fixed cost 36,000
Net profit 11,000
Other factors that need to be considered:-
A company is able to produce four products and is planning its production mix for the next period. Estimated sales and production data follow:-
Product w x y z
SP per unit 29 36 61 51
Labour (@£5/hr) 15 10 35 25
Materials(@£1/kg) 6 18 10 12
Contribution 8 8 16 14
Product w x y z
Labour (Hours) 3 2 7 5
Materials (Kg) 6 18 10 12
Maximum Demand 5,000 5,000 5,000 5,000
If labour hours are limited to 50,000 in a period
If material is limited to 110,000 kgs in a period
$500,000 – $300,000 = $200,000
Formula for and computation of contribution margin
A company makes a single product with a sales price of Rs 10 and a marginal cost of Rs 6. Fixed costs are Rs 60,000. Calculate:-
Margin of Safety in Dollars
– =Formula for margin of safety in dollars
The size of margin of safety is an extremely valuable guide to the strength of a business. If it is large, there can be substantial falling of sales and yet a profit can be made. On the other hand, if margin is small, any loss of sales may be a serious matter.
Actual (Expected) Sales
Margin of Safety Ratio
$250,000 ÷ $750,000 = 33%
Formula for margin of safety ratio
The formula and calculation for determining the margin of safety ratio are:
A company producing a single article sells it at $ 10 each. The marginal cost of production is $ 6 each and fixed cost is $ 400 per annum. You are required to calculate the following:
A breakeven chart can be used to show the effect of changes in any of the following profit factors:
A manufacturer incurred the following costs in a period for his sole product:-
Labour (25 % variable) 8,000
Materials (100 % variable) 12,000
Selling costs (10 % variable) 2,000
Other costs (fixed) 7,000
Total costs 29,000
A normal period’s sales are 500 units at Rs 70 each, but up to 650 units could be made in a period. Various alternatives are being considered:-
What is the most profitable pan? What are the C/S ratio? What is the break-even point for each alternative.