MGT402 Assignment#2 Idea Solution.

Q#01 (marks 20)
The Delta Corporation produced 24000 units (normal capacity) of product during the first quarter of the year; 20,000 units were sold at Rs. 30 per unit. The costs of this production were:

Particulars --------------------Rs
Materials--------------------------------80,000
Direct Labor----------------------------100,000
Factory overhead variable cost ------- 120,000
Factory overhead fixed cost------------72,000
Marketing and administrative expenses for the quarter total Rs. 60,000; all are fixed expenses.

Required:
1. Prepare an income statement under absorption costing
2. Prepare an income statement under direct costing


Solution:-
Income Statement under Absorption Costing System

-------------------------------------------------Rupees

Sales (20,000 x 30)--------------------------600,000

Less Cost of goods sold
Opening stock 0
Add Production cost
(15.5 x 24,000)-----------------------------372,000
Less Closing stock
(15.5 x 4,000)--------------------------------62,000
-------------------------------------------------310,000
Gross Profit---------------------------------- 290,000

Less Operating expenses
Selling & Administrative expenses
Fixed expenses----------------------------------60,000
Net profit----------------------------------------230,000

Income Statement under Direct Costing System
--------------------------------------------------Rupees
Sales (20,000 x 30)---------------------------600,000

Less Variable cost of goods sold
Opening stock 0
Add Variable production cost
(10.5 x 24,000)------------------------------252,000
Less Closing stock
(10.5 x 4,000)--------------------------------42,000
-------------------------------------------------210,000
Gross Profit-------------------------------------390,000

Less Fixed Expenses
Production--------------120,000
Fixed expenses--------- 60,000
------------------------------------------------180,000
Net Profit-------------------------------------210,000

Reconciliation
Profit as absorption costing-------------------230,000
Less Closing stock (4,000 x 5)---------------20,000
Profit as per Marginal costing-----------------210,000

Q# 02 (marks 10)

A company sold 100 units for Rs. 100 per unit. Variable cost of the product is Rs. 70 per unit and fixed cost is Rs. 2,000 but management decides to increase its sales by 10 units, decrease its sales price by 10% and fixed cost also increased to 2,350.

Being the managerial accountant of the company guide them by using decision making tool
(Contribution Margin Approach).
Required: Calculate the net profit with new and existing plan whether it is feasible for the management to accept new plan or not. Show complete working
Solution:-

A company sold 100 units for Rs. 100 per unit. Variable cost of the product is Rs. 70 per unit and fixed cost is Rs. 2,000

Sales(100x100)------------------10,000
Variable Cost(100x70)------------(7,000)
Contribution Margin---------------- 3,000
Fixed Cost---------------------------(2,000)
Profit/loss-------------------------- 1,000

Increase its sales by 10 units

Sales(110x100)----------------11,000
Variable Cost(110x70)--------(7,700)
Contribution Margin-----------3,300
Fixed Cost ----------------------(2,000)
Profit/loss------------------------1,300

Decrease its sales price by 10%

Sales(100x90)-------------------9,000
Variable Cost(100x70)-----------(7,000)
Contribution Margin --------------2,000
Fixed Cost --------------------------(2,000)
Profit/loss---------------------------0

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Fixed cost also increased to 2,350.

Sales(100x100)-------------------10,000
Variable Cost(100x70)--------------(7,000)
Contribution Margin------------------3,000
Fixed Cost-----------------------------(2,350)
Profit/loss------------------------------650