44-4example

AB company makes a product, the splash, which has a variable production cost of 6 dollars per unit and a sales price of 10 dollars per unit. At the beginning of September 20x0,there were no opening inventories and production during the month was 20000 units. Fixed costs for the month were 45000dollars. There were no variable marketing costs. Required

Calculate the contribution and profit for the month, using marginal costing principles, if sales were as follows. 10000 splashes, 20000 splashes and 15000 splashes

The stages in the profit calculation are as follows.

To identify the variable cost of sales, and then the contribution.

Deduct fixed costs from the total contribution to derive the profit;

Value all closing inventories at marginal production cost. 

1) Sales:100,000;150,000;200,000

2) contribution: 40,000.6,0000.8,0000

3) Profit:-5000,15000,35000

We can draw the conclusion as follows.

1)The profit per unit varies at differing levels of sales, because the average fixed overhead cost per unit changes with the volume of output and sales.

2)The contribution per unit is constant at all levels of output and sales. Total contribution, which is the contribution per unit multiplied by the number of units sold, increases in direct proportion to the volume of sales.

3)Since the contribution per unit does not change, the most effective way of calculating the expected profit at any level of output and sales would be as follows. First calculate the total contribution. Then deduct fixed costs as a period charge in order to find the profit. In our example, the expected profit from the sale of 17000 splashes would be as follows. Total contribution 17000*(10-6)=68000; less fixed costs 45000 which is fixed. And then obtain the profit 23000 dollars.