Under this method, the level has to be found out which is having lesser selling price, cost of operations and greater profits known as optimum level of operations.
A factory engaged in manufacturing plastic buckets is working at 40% capacity and produces 10,000 buckets per annum.
The present cost break up for bucket is as under
Overheads Rs.5(60% fixed)
The selling price is Rs 20 per bucket
If it is decided to work the factory at 50% capacity, the selling price falls by 3%. At 90 % capacity the selling price falls by 5% accompanied by a similar fall in the prices of material. You are required to calculate the profit at 50% and 90% capacities and also calculate break even point for the same capacity productions.
The very first step is to compute number of units at every level of capacity i.e. 50% and 90%.
But in this problem, 40 % capacity utilization given which amounted 10,000 units.
The important information is that the changes taken place in the selling price of the product.
Selling price = Rs.20 @ 40% i.e., 10,000 units
Selling price @ 50% i.e. 12,500 units = Rs.20–3% on Rs.20 = Rs.19.40
Selling price @90% i.e. 22,500 units=Rs.20–5% on Rs.20 = Rs.19
While preparing the marginal costing statement, the fixed cost portion should not be included for the computation of the contribution.
The next step is to prepare the marginal costing statement.
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