# Marginal Costing Part II

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Anishbhardwaj
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Marginal Costing
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• 1.

### The contribution margin is also knows as

• A.

Marginal costing

• B.

Net income

• C.

Net operating profit

A. Marginal costing
Explanation
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."

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• 2.

### What will be the difference in net earning computed using direct costing as opposed to absorption costing if the ending inventory increases with respect to the beginning inventory in terms of units?

• A.

There will be no difference in net earning

• B.

Net earnings computed using direct costing will be higher

• C.

The difference in net earnings can not be determined from the information given

• D.

Net earning computed using direct costing will be lower

D. Net earning computed using direct costing will be lower
Explanation
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.

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• 3.

### Wilson company prepared the following preliminary forcast concerning product G for 2002 assuming no expenditure for advertising Selling price per unit….Rs.10 Unit sales …..Rs.100000 Variable costs ……..Rs.6,00,000 Fixed costs……Rs.3,00,000 Based on a market study in December 2001 , Wilson estimated that it could increase the unit selling price by 15%and increase the sales volume by 10% if Rs.1,00,000were spent on advertising . Assuming that Wilson incorporates these changes in its 2002 forecast, what should be the operating income from product G?

• A.

Rs.1,75,000

• B.

Rs.1,90,000

• C.

Rs 2,05,000

• D.

Rs.3,65,000

C. Rs 2,05,000
Explanation
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.

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• 4.

### Binny company is planning its advertising compaign for 2001 and has prepared the following budget data based on a zero advertising expenditure Normal plant capacity …..2,00,000units                        sales……..1,50,000units Variable manufacturing costs …Rs.15.00/unit              selling price ……Rs.25.00/ units Fixed cost Manufacturing……Rs.8,00,000 Selling and administrative ….Rs.7,00,000 An advertising agency claim that an aggressive advertising campaign would enable Binny to increase its sales units by 20%. What is the maximum amount that Binny can pay for advertising and obtain an operating profit of Rs.2,00,000?

• A.

Rs.1,00,000

• B.

Rs.2,00,000

• C.

Rs.3,00,000

• D.

Rs.5,50,000

A. Rs.1,00,000
Explanation
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.

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• 5.

### In planning its operation for 2001 based on a sales forecast of Rs.60,00,000 wallace Inc., prepared the following estimated data:                                                                                                                                         Costs and expenses                                                                                             Direct materials Direct labour Factory overheads Selling expenses Administrative expenses Variable     Rs28,60,000 1,40,000 6,00,000 2,40,000 60,000 fixed                 Rs.9,00,000            3,60,000 1,40,000        Rs.39,00,000     Rs.14,00,000   What would be the amount of sales at the break-even point?

• A.

Rs.22,50,000

• B.

Rs.35,00,000

• C.

Rs.40,00,000

• D.

Rs.53,00,000

C. Rs.40,00,000
Explanation
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.

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• 6.

### 31Warfield company is planning to sell 1,00,000 units of product T for Rs.12.00 a unit . The fixed cost are Rs.2,80,000. In order to relies a profit  of Rs.2,00,000, what would be the variable cost be?

• A.

Rs.4,80,000

• B.

Rs.7,20,000

• C.

Rs.9,00,000

• D.

Rs.9,20,000

B. Rs.7,20,000
Explanation
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.

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• 7.

### The Seahawk company is planning to sell 2,00,000 units of product B, the fixed cost are Rs.4,00,000 and variable cost are 60% of the selling price. In order to release a profit of Rs.1,00,000 the selling price per unit would have to be

• A.

Rs.3.75

• B.

Rs.4.17

• C.

Rs.5.00

• D.

Rs.6.25

D. Rs.6.25
Explanation
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.

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• 8.

### At a break even point of 400 unit sold the variable cost were Rs.400 and the fixed cost were Rs.200. What will the 401st unit sold contribute to profit before income taxes?

• A.

0

• B.

Rs.0.50

• C.

Rs.1.00

• D.

Rs.1.50

B. Rs.0.50
Explanation
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.

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• 9.

### Tom company has sales of Rs.2,00,000 with variable expenses of Rs.1,50,000,fixed expenses of Rs.60,000 and an operating loss of Rs.10,000. By how much would Tom have to increase its sales in order to achieve an operating income of 10%of sales?

• A.

Rs.4,00,000

• B.

Rs.2,51,000

• C.

Rs.2,31,000

• D.

Rs.2,00,000

D. Rs.2,00,000
Explanation
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.

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• 10.

### If the fixed cost attendant to a product increases while variable cost and sales price remains constant, what will happen to (1) contribution margin, and (2) break even point? Contribution margin                                                   break even point

• A.

Contribution margin Increase and Break even point Decrease

• B.

Contribution margin Decrease and Break even point Increase

• C.

Contribution margin Unchanged and Break even point Increase

• D.

Contribution margin Unchanged and Break even point Unchanged

C. Contribution margin Unchanged and Break even point Increase
Explanation
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.

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• 11.

### The ship company is planning to produce two products, Alt and Tude. Ship is planning to sell 1,00,000 units of Alt at Rs.4 a unit and 2,00,000 units of Tude at Rs.3 a unit. Variable costs are 70% of sales for Alt and 80% of sales for Tude. In order to realise a total profit of Rs.1,60,000, what must the total fixed cost be?

• A.

Rs.80,000

• B.

Rs.90,000

• C.

Rs.2,40,000

• D.

Rs.6,00,000

A. Rs.80,000
Explanation
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.

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• 12.

### Which of the following best describes a fixed cost?

• A.

It may change in total where such change is unrelated to change in production

• B.

It may change in total where such change is related to changes in production

• C.

It is constant per unit of change in production

• D.

It may change in total where such change depends on production within the relevant range.

A. It may change in total where such change is unrelated to change in production
Explanation
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.

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• Current Version
• Mar 21, 2023
Quiz Edited by
ProProfs Editorial Team
• Jul 31, 2011
Quiz Created by
Anishbhardwaj

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