Marginal Costing Part II

The contribution margin is a term used in marginal costing, which is a costing technique that focuses on the contribution margin of a product or service. It represents the difference between the sales revenue and the variable costs associated with producing that product or service. By analyzing the contribution margin, a company can determine the profitability of individual products or services and make decisions regarding pricing, production levels, and cost control. Therefore, the correct answer is "Marginal costing."

The 401st unit sold will contribute Rs.0.50 to the profit before income taxes because at the break-even point, the variable cost per unit is Rs.1 (total variable cost of Rs.400 divided by 400 units). Since the fixed cost remains the same regardless of the number of units sold, the contribution margin per unit is Rs.0.50 (selling price of Rs.1 minus variable cost of Rs.0.50). Therefore, the 401st unit sold will contribute Rs.0.50 to the profit before income taxes.

To calculate the operating income from product G, we need to consider the increase in unit selling price and sales volume due to advertising expenditure.

The initial unit selling price is Rs.10 and the initial unit sales are 100,000. The initial revenue is calculated by multiplying the selling price per unit with the unit sales, which is Rs.10 * 100,000 = Rs.10,00,000.

The variable costs are given as Rs.6,00,000 and the fixed costs are Rs.3,00,000. The total costs are calculated by adding the variable costs and fixed costs, which is Rs.6,00,000 + Rs.3,00,000 = Rs.9,00,000.

The initial operating income is calculated by subtracting the total costs from the revenue, which is Rs.10,00,000 - Rs.9,00,000 = Rs.1,00,000.

Now, considering the changes due to advertising expenditure, the unit selling price increases by 15% (Rs.10 * 15% = Rs.1.50) and becomes Rs.11.50. The unit sales increase by 10% (100,000 * 10% = 10,000) and become 110,000.

The new revenue is calculated by multiplying the new selling price per unit with the new unit sales, which is Rs.11.50 * 110,000 = Rs.12,65,000.

The new operating income is calculated by subtracting the total costs from the new revenue, which is Rs.12,65,000 - Rs.9,00,000 = Rs.3,65,000.

Therefore, the operating income from product G should be Rs.3,65,000.

The total profit can be calculated by subtracting the total variable costs from the total sales revenue. For Alt, the sales revenue is 1,00,000 units * Rs.4 = Rs.4,00,000 and the variable costs are 70% of sales, so 0.7 * Rs.4,00,000 = Rs.2,80,000. For Tude, the sales revenue is 2,00,000 units * Rs.3 = Rs.6,00,000 and the variable costs are 80% of sales, so 0.8 * Rs.6,00,000 = Rs.4,80,000. Therefore, the total sales revenue is Rs.4,00,000 + Rs.6,00,000 = Rs.10,00,000 and the total variable costs are Rs.2,80,000 + Rs.4,80,000 = Rs.7,60,000. To realize a total profit of Rs.1,60,000, the total fixed cost must be Rs.10,00,000 - Rs.7,60,000 - Rs.1,60,000 = Rs.80,000.

The fixed cost of Rs.2,80,000 is already given. In order to achieve a profit of Rs.2,00,000, the total cost (fixed cost + variable cost) should be Rs.4,80,000 (profit + fixed cost). To find the variable cost, we subtract the fixed cost from the total cost: Rs.4,80,000 - Rs.2,80,000 = Rs.2,00,000. Therefore, the variable cost would be Rs.2,00,000.

A fixed cost is a cost that remains constant in total regardless of changes in production. This means that even if the production levels increase or decrease, the fixed cost remains the same. The answer option "It may change in total where such change is unrelated to change in production" accurately describes this characteristic of fixed costs.

To calculate the maximum amount that Binny can pay for advertising and still obtain an operating profit of Rs.2,00,000, we need to consider the increase in sales units due to the advertising campaign. The advertising agency claims that sales units will increase by 20%.

Currently, Binny sells 1,50,000 units. So, with a 20% increase, the new sales units will be 1,50,000 + (20/100) * 1,50,000 = 1,80,000 units.

To calculate the maximum amount for advertising, we need to determine the additional contribution from the increased sales units. The contribution per unit is the selling price (Rs.25.00) minus the variable manufacturing cost (Rs.15.00), which is Rs.10.00.

The additional contribution from the increased sales units is Rs.10.00 * 30,000 units (1,80,000 - 1,50,000) = Rs.3,00,000.

To obtain an operating profit of Rs.2,00,000, we need to deduct the fixed costs (manufacturing cost + selling and administrative cost) from the additional contribution.
Fixed costs = Rs.8,00,000 + Rs.7,00,000 = Rs.15,00,000.

Maximum amount for advertising = Additional contribution - Fixed costs + Operating profit
= Rs.3,00,000 - Rs.15,00,000 + Rs.2,00,000
= Rs.1,00,000.

Therefore, the maximum amount that Binny can pay for advertising and obtain an operating profit of Rs.2,00,000 is Rs.1,00,000.

The selling price per unit would have to be Rs.6.25 in order to release a profit of Rs.1,00,000. This can be calculated by using the formula: Selling Price = (Fixed Cost + Variable Cost + Desired Profit) / Number of Units. In this case, the fixed cost is Rs.4,00,000, the variable cost is 60% of the selling price, and the desired profit is Rs.1,00,000. By substituting these values into the formula, we can solve for the selling price per unit, which is Rs.6.25.

If the fixed cost of a product increases while the variable cost and sales price remain constant, the contribution margin will remain unchanged. The contribution margin is the difference between the sales price and the variable cost, and since these values are not changing, the contribution margin will stay the same. However, the break-even point will increase. The break-even point is the level of sales at which the company covers all of its costs and begins to make a profit. With an increase in fixed costs, the company will need to sell more units to cover these higher costs and reach the break-even point. Therefore, the break-even point will increase.

The break-even point is the point at which a company's total revenue equals its total costs, resulting in zero profit or loss. In this case, the estimated costs and expenses for the company in 2001 amount to Rs.39,00,000. To reach the break-even point, the company would need to generate sales equal to this amount. Therefore, the amount of sales at the break-even point would be Rs.39,00,000.

When the ending inventory increases with respect to the beginning inventory in terms of units, net earnings computed using direct costing will be lower compared to absorption costing. This is because direct costing only considers variable manufacturing costs as part of inventory, while absorption costing includes both variable and fixed manufacturing costs. As the ending inventory increases, more fixed manufacturing costs are allocated to inventory under absorption costing, resulting in higher net earnings. However, since direct costing does not include fixed manufacturing costs in inventory, the net earnings calculated using this method will be lower.

To calculate the increase in sales required to achieve an operating income of 10% of sales, we need to first calculate the target operating income. The target operating income can be found by multiplying the sales by 10% (0.10). In this case, the target operating income would be Rs.2,00,000 x 0.10 = Rs.20,000.

To achieve this target operating income, we need to cover the fixed expenses (Rs.60,000) and the variable expenses (Rs.1,50,000) as well. Therefore, the total expenses that need to be covered are Rs.60,000 + Rs.1,50,000 = Rs.2,10,000.

To find out how much sales would be required to cover these expenses and achieve the target operating income, we need to add the total expenses to the target operating income. Rs.2,10,000 + Rs.20,000 = Rs.2,30,000.

Therefore, Tom would have to increase its sales by Rs.2,30,000 - Rs.2,00,000 = Rs.30,000 in order to achieve an operating income of 10% of sales.