Application of Marginal Costing in Decision Making-Questions Example 1: Make or Buy
Application of Marginal Costing in Decision Making-Questions Example 1: Make or Buy
An overseas customer has placed a one-off bulk purchase order of 2,000 units, but the maximum price
he is willing to pay is $16 per unit. No variable costs would be incurred if the order is accepted. Should
the firm accept the order?
ABC Ltd manufactures a product called Astro. The normal output for this product is 200,000 units. The
following is a summarized cost statement relating to production of Astro:
$ $
Materials 5.00
Direct Wages 7.00
Factory overheads: Fixed 4.50
Variable 1.00 5.50
Administration overhead: Fixed 2.00
Selling overheads: Fixed 3.50
Variable 3.00 6.50
26.00
The selling price of the product is $36.
During the year, the company received 2 special orders, each involving the production of 2,000 units.
Option 1 related to the production of a Super Astro. Under this option, variable costs would increase by
25% but selling price cannot exceed $25.00 per unit.
Option 2 related to the production of Hyper Astro, under which variable costs would decrease by 25%
but the selling price would be $19.00 per unit.
Due to normal production commitments, only one of the 2 options can be selected.
Required:
(a) What would be the profits in normal trading if:
(i) The selling price was increased to $40 per unit and output restricted to 160,000 units.
(ii) The selling price was decreased to $28 per unit and output increased to 260,000 units.
(b) Advise the firm as to which option should be accepted.
DEF Ltd produces 4 products, and details of costs and revenues are as follows, based on absorption
costing approach:
Total Product A Product B Product C Product D
Sales 122,600 45,000 55,000 20,000 2,600
Variable costs (81,200) (33,000) (25,000) (21,000) (2,200)
Fixed costs (25,500) (10,000) (12,000) (2,500) (1,000)
Profit/(Loss) 15,900 2,000 18,000 (3,500) (600)
It has been suggested that Products C and D should be discontinued given that they are loss-making.
Should the firm drop these 2 products?
GHI Ltd has been making losses at one of their branches for some time and is considering its closure. The
branch budget extract for the following year is as follows:
Turnover $30,000
Contribution margin ratio 20%
Fixed costs $ 40,000
The firm has determined that fixed costs will be $31,000 if the branch is closed as it will no longer have
to pay for rent of the branch building.
Determine whether to close down or to continue operation of the branch.
Required:
(a) Calculate the monthly shortfall in machining hours.
(b) Determine the monthly production plan in units that will maximise the company’s total
contribution.