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Murphy Ltd - Leaving Cert Accounting - Question 8 - 2014
Question 8
Murphy Ltd. produces a single product. The company’s profit and loss account for the year ended 31/12/2013, during which 16,000 units were produced and sold, was as ... show full transcript
Worked Solution & Example Answer:Murphy Ltd - Leaving Cert Accounting - Question 8 - 2014
Step 1
The company’s break-even point and margin of safety.
Answer
To find the break-even point, we must determine fixed costs and the contribution per unit.
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Total Fixed Costs:
Fixed Costs = Administration overhead + Fixed portion of Factory overhead
Fixed Costs = €85,000 + €20,000 = €105,000
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Contribution per Unit:
Contribution = Selling Price - Variable Costs per Unit
Selling Price = €30 (from €480,000 total sales / 16,000 units)
Variable Costs = Direct materials + Direct Labour + Variable Factory overhead = €7.50/unit
Contribution = €30 - €7.50 = €22.50
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Break-even Point (units):
Break-even Units = Total Fixed Costs / Contribution per Unit
Break-even Units = €105,000 / €22.50 = 4,667 units
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Total Sales to Break Even:
Break-even Sales = Break-even Units * Selling Price
Break-even Sales = 4,667 * €30 = €140,010
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Margin of Safety:
Margin of Safety = Total Sales - Break-even Sales
Margin of Safety = €480,000 - €140,010 = €339,990
Step 2
Roughly sketch a graph, showing your break-even point.
Answer
- Y-axis: Revenue and Costs (€) 2. X-axis: Output (units) 3. Plot Total Revenue: Straight line starting from the origin, increasing at a rate of €30 per unit. 4. Plot Total Costs: A line starting at €105,000 that increases at a rate of 22.50 per unit. The intersection of the two lines is the break-even point at 4,667 units. Label this point on the graph.
Step 3
The profit the company would make from reduced selling price.
Answer
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New Selling Price:
Selling Price after reduction = €30 - (5% of €30) = €28.50
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New Sales Volume: 19,000 units
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Sales Revenue = Volume * New Selling Price: Sales Revenue = 19,000 * €28.50 = €541,500
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Variable Costs:
New Direct Labour = €110,000 + €5,000 = €115,000
Total Variable Costs = Direct materials + Direct Labour + Factory overheads
= €120,000 + €115,000 + €60,000 = €295,000
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Contribution: Contribution = Sales Revenue - Total Variable Costs
= €541,500 - €295,000 = €246,500 -
Total Fixed Costs remain the same: €105,000
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Net Profit = Contribution - Fixed Costs: Net Profit = €246,500 - €105,000 = €141,500
Step 4
The number of units that must be sold at €26 per unit to provide a profit of 20% of the sales value from these same units.
Answer
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Target Profit:
Desired Profit = 20% of Sales Value = 0.20 * Sales
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Selling Price per unit: €26
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Contribution per Unit = Selling Price - Variable Cost per Unit (from previous calculation) = €26 - €22.50 = €3.50
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Equation:
Total Sales - (Fixed Costs + Target Profit) = Contribution Units x Contribution per Unit
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Formulate:
Let x be the number of units sold.
26x - (105,000 + 0.20 * 26x) = 3.50x
26x - 105,000 - 5.2x = 3.50x
26x - 5.20x - 3.50x = 105,000
17.30x = 105,000
x = 6,073 units (approximately)
Step 5
The profit the company would make in 2014 if a commission of 5% of sales is given to sales staff.
Answer
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New Sales Volume: 17,000 units at new price per unit = €30
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Sales Revenue: Sales Revenue = 17,000 * €30 = €510,000
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Variable Costs: Direct Material = €0.60 x 17,000; Direct Labour = €0.50 x 17,000; New Variable Overhead = €0.40 x 17,000; Commission = 5% of €510,000 = €25,500 Total Variable Costs = €10.50 * 17,000 + €25,500 = €185,500
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Contribution: Contribution = Sales Revenue - Total Variable Costs = €510,000 - €185,500 = €324,500
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Fixed Costs = €105,000
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Net Profit = Contribution - Fixed Costs = €324,500 - €105,000 = €219,500
Step 6
Prepare Profit and Loss statements under Marginal Costing and Absorption Costing principles for Barry Ltd.
Answer
Absorption Costing (Sales - €36,000):
- Total Cost = Direct materials + Direct Labour + Variable Overhead + Fixed Overhead
- Profit = Sales - Total Cost = €36,000 - (6,000 + 5,000 + 4,000 + 4,000) = €18,900
Marginal Costing (Sales - €36,000):
- Profit = Sales - (Direct materials + Direct Labour + Variable Overhead + Fixed Costs) = €36,000 - (6,000 + 5,000 + 4,000 + 4,000) = €18,900
Step 7
Outline the differences between Marginal and Absorption costing.
Answer
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Cost Treatment: Marginal costing treats all fixed manufacturing overhead as a period cost, whereas absorption costing allocates fixed manufacturing overheads to individual product costs.
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Profit Reporting: Under marginal costing, profit is based on contribution margin while absorption costing is based on fully allocated costs.
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Stock Valuation: Closing stock under marginal costing does not include fixed overhead, while it does under absorption costing, affecting profit figures.
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Usage: Marginal costing is used primarily for internal management decisions while absorption costing aligns with reporting standards.