Marginal Costing and Breakeven Analysis

Question 1
A company’s cost records show the following data:
Year Production Total cost
(in units) ($’000)
1 3,590,000 178,700
2 4,020,000 195,800
3 3,700,500 183,200
4 4,000,100 195,300
5 3,510,000 175,400

Required:
(a) Use the high/low method to estimate the company’s annual fixed costs.
(b) Calculate the expected total costs at an output level of 3,000,000 units.
[(a) $35,000,000; (b) $155,000,000]

Question 2
The following cost statement relates to a product which sells for $100 per ton. The sales level is
10,000 tons.
$ per ton
Direct materials 30.00
Direct wages 20.00
Variable overhead 10.00
60.00
Fixed overhead 20.00
Total cost 80.00

Required:
(a) Calculate the contribution to sales ratio.
(b) Calculate the breakeven point in $ and tons.
(c) Calculate the margin of safety in tons and %.
[(a) 40%; (b) $500,000; 5,000 tons; (c) 5,000 tons; 50%]

Question 3
A business makes the following estimates:
Selling price per unit $97.50
Variable cost per unit $68.25
Annual fixed costs $27,300

Required:
(a) Calculate the contribution to sales (C/S) ratio.
(b) Calculate the break-even point in units and value.
(c) Calculate the resulting profit and the margin of safety (in units) from the sales of 1,200 units.
(d) Calculate level of sales required (in units and value) to achieve a target profit of $13,065.
(e) Calculate the breakeven point (in units and value) given a 10% decrease in selling price and a
5% increase in fixed costs.
Mr Shandeep JUGNARAIN (BSc, MBA, FCCA)
1
 Marginal Costing and Breakeven Analysis

[Ans: (a) 30%; (b) 933 units; $91,000; (c) $7,800; 267 units; (d) 1,380 units; $134,550; (e) 1,470
units; $128,992.50]

Question 4
The recent results of a manufacturing company are summarised as follows:
Sales 12,000 units @ $50 per unit
Variable cost per unit $30
Annual fixed cost $100,000

Required:
(a) Prepare the profit and loss statement under marginal costing.
(b) Calculate the breakeven point (in units and value) and the percentage margin of safety.
(c) What are the limitations of break-even analysis?
[Ans: (a) Contribution $240,000; Profit $140,000; (b) 5,000 units; $250,000]

Question 5
An electrical component manufacturer budgets to sell 36,000 units although the factory has a
capacity to produce 40,000 units in normal circumstances.

Variable costs per unit are:

$
Direct materials 8.00
Direct wages 2.00
Overheads 4.00

Fixed costs for the period are expected to be $201,600. The selling price is $20 per unit.

Required:
(a) Calculate how many units must be made and sold in order to breakeven during the period.
(b) Calculate the budgeted profit for the period assuming there are no inventories.
(c) Calculate the number of units to be manufactured when the amount of capital employed in this
production is $330,000 and the directors require a 15% return on capital employed.
(d) Comment on the results calculated in (c) above.
[Ans: (a) 33,600; (b) $14,400; (c) 41,850]

Question 6
The summarised results of Bridgetown Limited are as follows:
Year 1 Year 2
$ $
Sales 58,200 62,700
Profit 2,050 3,175

You are required to calculate:

(a) the contribution to sales ratio;
(b) the fixed costs per annum;
Mr Shandeep JUGNARAIN (BSc, MBA, FCCA)
2
 Marginal Costing and Breakeven Analysis

(c) the level of sales required to breakeven;

(d) the resulting profit or loss at a sales level of $45,000;
(e) the level of sales required to achieve a profit of $3,500 and the margin of safety in $.
[Ans: (a) 25%; (b) $12,500; (c) $50,000; (d) Loss $1,250; (e) $64,000; $14,000]

Question 7
The sales of a company were $8,000 during the first six months of trading. Its total costs for the
same period was $7,800. During the last six months sales doubled and the total costs for the
second half year increased to $12,600.

You are required to calculate:

(a) the annual fixed costs;
(b) the breakeven sales level;
(c) the amount of profit expected from an annual sales level of $30,000;
(d) the sales level required to achieve an annual profit of $4,000.
[Ans: (a) $6,000; (b) $15,000; (c) $6,000; (d) $25,000]

Question 8
The budgeted information for Megatech Limited for the forthcoming year, analysed by product, are
as follows:
Product A Product B
Sales (units) 2,000 6,000
Selling price per unit $8 $9
Variable cost per unit $4 $8
Attributable fixed costs $1,120 $1,680

General fixed costs, which are apportioned to products as a percentage of sales value, are
budgeted at $4,200.

Required:
(a) Prepare a profit and loss statement showing the contribution and profit of each product and
the company as a whole.
(b) Calculate the breakeven point of each product in units and value.
[Ans: (b) A=$8,000; 1,000 units; B=$27,000; 3,000 units]

Mr Shandeep JUGNARAIN (BSc, MBA, FCCA)

3
 Marginal Costing and Breakeven Analysis

Question 9
Ace Limited is a manufacturing company with the following trading results for the year ending 30
September 2022:
$ $
Sales revenue 100,000
Less Cost of goods sold 60,000
Gross profit 40,000
Less Overheads – Fixed 10,000
Variable 20,000
30,000
Profit for the year 10,000

The company is preparing its budget for the forthcoming year with the following proposed
alternatives:
A. To increase selling price by 10%.
B. To increase sales volume by 20%.
C. To reduce selling price by 40% which will increase sales volume by 15%. This would
necessitate additional fixed costs of $1,000.

Required:
(a) Prepare the budgeted profit and loss statement (under marginal costing) for each of the
alternatives A, B and C.
(b) Advise management about the most suitable alternative to be adopted.
[Ans: (a) A-Profit $20,000; B-Profit $14,000; C-Loss $34,000]

Question 10
The following figures were taken out from the records of Sunlite Limited for the year ended 30
September 2022:
$
Sales revenue 30,000
Direct materials 8,500
Direct labour 9,000
Production overheads – Fixed 1,000
Variable 2,300
General overheads (fixed) 4,700

Required:
(a) Prepare a profit and loss statement for the year ended 30 September 2022 so as to
emphasise ‘contribution’.
(b) Calculate the contribution to sales ratio and the breakeven point.
(c) Calculate the expected profit levels under each of the following option plans:
A. increasing the selling price by 5% which would reduce sales volume by 8%;
B. reducing the selling price by 9% which would result in an increase of 10% in sales volume.
As a result, direct materials cost per unit would fall by 5% and fixed production overheads
would increase by 2%;
Mr Shandeep JUGNARAIN (BSc, MBA, FCCA)
4
 Marginal Costing and Breakeven Analysis

C. increasing the sales volume by 20% by reducing selling price by 15%. This would result in
10% fall in material cost and variable production overheads. All fixed costs will rise by 5%;
(d) Advise which plan should the company adopt.
[Ans: (a) Profit $4,500; (b) 34.0%; $16,765; (c) A-Profit $5,064; B-Profit $2,998; C-Profit $2,151]

Question 11
Base Limited manufactures a single product. The following figures have been forcast for the year
to 31 December 2023:
Output and sales 60,000 units
Selling price $25 per unit
Direct materials $12 per unit
Direct labour $6 per unit
Variable overhead $3 per unit
Fixed overhead $200,000 per annum

The above output level can be achieved by working at 75% capacity.

The company has achieved an enquiry regarding a major export order for 50,000 units at a price of
$24 per unit, to be fulfilled during the next twelve months. It is not possible to take on part only of
this export.

The directors are considering four courses of action:

1. To decline the export order.
2. To take on the export order and reduce home sales.
3. To increase production in excess of 100% capacity by working overtime to the level necessary
to meet home sales and fulfil the export order. In overtime conditions direct labour costs
would rise by 50% and variable overhead costs by 20%.
4. Installing new machinery which would increase productive capacity by 25% and would
increase fixed costs by 30% per annum. Overtime (on the same terms as in (3) above) can be
worked if necessary.

Required:
(a) Calculate the profit arising from each of the proposals 1, 2, 3 and 4.
(b) Advise management on the best proposal.
[Ans: (a) Proposal 1 – Profit $40,000; Proposal 2 – Profit $70,000; Proposal 3 – Profit $82,000;
Proposal 1 – Profit $94,000]

Question 12
Francesca manufactures a single product X.
The following budgeted information is available for product X for the month December 2023.
Selling price per unit $2.00
Contribution to sales ratio 62.5%
Fixed costs $50,000
Production and sales 100,000 units

Mr Shandeep JUGNARAIN (BSc, MBA, FCCA)

5
 Marginal Costing and Breakeven Analysis

Required:
(a) From the above information prepare a budgeted profit or loss statement for the month of
December 2023 under marginal costing format showing clearly the contribution. [4]
(b) Calculate the break-even point in units and $. [2]
(c) Calculate the percentage margin of safety. [1]
(d) Calculate the sensitivity ratio (in percentage) of a change in the following variables on profit:
(i) Selling price;
(ii) Variable cost per unit;
(iii) Total fixed costs; and
(iv) Sales volume. [4]
(e) From your answers in (d) above, state which of the variables is the most sensitive, explaining
the impact of the variable on profit. [3]

Additional information
Francesca is considering opening another factory in January 2024 to produce two new products, Y
and Z.
The following information is available.
Y Z
$ per unit $ per unit
Direct material 2 4
Direct labour ($5 per hour) 10 5
Variable overhead 1.5 1.5
Selling price 23 18
Forecast demand for January 2024 is 4,000 units of Y and 6,000 units of Z. During that month,
fixed costs are forecast to be $60,000. Only 10,000 labour hours would be available to produce
both products. Sales of Product X would not change.

Required:
(f) Determine the optimal production plan of Products Y and Z with the 10,000 labour hours and
calculate the resulting profit that can be achieved in the month of January 2024 [8]

Additional information
In order to meet the forecast demand in January 2024, Francesca is considering buying the
products from another supplier in case enough labour is not available to produce them.

Required:
(g) State the factors Francesca should consider in her make or buy decision. [3]
[Ans: (a) Profit $75,000; (b) $80,000; 40,000 units; (c) 60%; (d)(i) 37.5%; (ii) 100%; (iii)
150%; (iv) 60%; (e) Selling price; (f) 2,000Y & 6,000Z; Profit $129,000]

Mr Shandeep JUGNARAIN (BSc, MBA, FCCA)

6