Marginal Costing

TINTIN & HADDOCK PLC
Internal Memorandum

To: Mr Jone, Chairman
From:
Date:
Subject: Evaluation of the different proposals to improve profits

Following the recent board meeting, we have evaluated the different proposals and come up with one project that we recommend. In doing this, we have calculated the change in profits compared with the draft budget and compiled the Break-even charts to justify our recommendation.
Marginal Costing Profit Statement of the draft budget £(000) £ (000)
Sales 1000
Less Cost of sales:
Direct Materials 320
Direct wages 200
Variable factory overheads 100 (620)
Contribution 380
Less Fixed Costs:
Fixed factory overheads 100
Selling and distribution overheads 120
Administration overheads 180 (400) Loss (20)
Unit selling price = 1,000,000/50,000 = £20
Unit variable cost = 620,000/50,000 = £12.4
Contribution per unit = 20-12.4 = £7.6
PROPOSAL A
Workings
Salesmen commission of 10% of sales = 10% * 1,000,000 = £100,000
Sales commission will be £2 per unit.

Variable costs = 320,000+300,000+100,000
= £720,000

Variable cost per unit = 720,000/50,000 = £14.4 per unit

Contribution per unit = 20 -14.4 = £5.6 per unit

C/S ratio = Contribution per ratio / selling price per unit = 5.6/20 = 28%

Break-even point in terms of units = Fixed costs / Contribution per unit = 400,000 / 5.6 = 71,429 units

Break-even point in terms of sales = Fixed costs / C/S ratio = 400,000 / 0.28 = £1,428,571.43

Marginal costing profit statement for proposal A

£ £
Sales 1,428,571.43
Less cost of sales:
Direct materials 457,142.85
Direct wages 285,714.28
Variable factory overheads 142,857.14 (885,714.27)
Contribution 542,857.16
Less fixed costs:
Factory overheads 100,000
Selling and