Marginal costing flashcards

Topic 10: Marginal costing

Classify factory rent by tracing and by behaviour

Indirect (it cannot be traced to one unit) and fixed. "Direct or indirect" is about tracing; "fixed or variable" is about behaviour.

Loaves sell at £2.40; variable cost £1.50; fixed costs £9,900. Contribution, break-even and C/S ratio?

Contribution £0.90. Break-even 9,900 ÷ 0.90 = 11,000 loaves (£26,400 revenue). C/S ratio 0.90 ÷ 2.40 = 0.375.

Same loaves (contribution £0.90, fixed costs £9,900): units for a target profit of £6,300

(9,900 + 6,300) ÷ 0.90 = 18,000 loaves. Round target-profit units up.

Price £16, variable cost £10, fixed costs £27,000, budgeted sales 6,000. Break-even and margin of safety?

Break-even 27,000 ÷ 6 = 4,500 units. Margin of safety 1,500 units, 25% of budgeted sales.

A part costs £7.80 marginal cost to make and £7.20 to buy; fixed costs unaffected. Saving from buying 5,000?

£0.60 × 5,000 = £3,000, before non-financial factors such as quality and reliability of supply.

Material is scarce. J: contribution £12 using 3 kg. K: contribution £10 using 2 kg. Which first?

K: £5 per kg against £4 per kg for J. Rank by contribution per unit of the limiting factor.

A line has contribution £8,000 and apportioned fixed costs £11,000, of which £5,000 is avoidable. Effect of closing it?

Lose £8,000 contribution, save £5,000: profit falls by £3,000, so keep it on financial grounds.

With spare capacity and no extra costs, what is the lowest price at which a special order adds to profit?

Any price above marginal cost. Then consider existing customers' reaction, repeat orders and reputation.

What moves the break-even point?

A higher price or lower variable cost raises contribution per unit, so break-even falls. Higher fixed costs raise break-even.

Three limitations of break-even analysis

Costs rarely split cleanly into fixed and variable; one price and constant variable cost are assumed; fixed costs assumed constant; all output assumed sold; sales mix matters; forecasts may be wrong.