SHORT QUESTION (ESSAY / CASE STUDY / EXERCISE)

Answer ALL questions.

Mary commenced business in January 2019, manufacturing a single product. At the end of 2019 she calculated her profit using the absorption costing method and was pleased with the profits that were realised. However, she recently read that preparation of the income statement according to the marginal costing method would be more beneficial to her. She also learnt that if there are opening or closing inventories, then the profits calculated using the two methods would be different.

She forecasted her sales and costs for July to December 2021 and wanted to undertake cost-volume-profit (CVP) analysis since it made use of the marginal costing approach with which she was impressed.

QUESTION 1 (20 Marks)

REQUIRED

Prepare the Income Statement of Mary's Manufacturers the year ended 31 December 2020 using the:

1.1 Marginal costing method. (10 Marks)

1.2 Absorption costing method. (10 Marks)

INFORMATION

The following information was extracted from the accounting records of Mary's Manufacturers for the years ended 31 December 2020 and 31 December 2019:

31 December 2020 31 December 2019

Units R Units R

Sales for the year 3 500 ? 3 700 666 000

Selling price per unit 200 180

Production for the year 4 100 4 000

Finished goods at beginning of year ? Nil

Variable manufacturing costs per unit 50 45

Variable selling and administrative costs per unit 25 24

Fixed manufacturing costs per year 45 100 36 000

Fixed selling and administrative costs per year 24 000 25 000

Additional information

1. Mary's Manufacturers uses the FIFO method for the valuation of inventory.

2. The increase in the fixed manufacturing costs is due to a new rental agreement in respect of the factory.

QUESTION 2 (10 Marks)

REQUIRED

Use the information provided below to answer each of the following questions independently:

2.1 Calculate the break-even quantity. (2 Marks)

2.2 Calculate the sales value required to achieve a net profit of R150 000, using the marginal

income ratio. (4 Marks)

2.3 Determine the selling price per unit if a net profit of R624 600 is desired. (4 Marks)

INFORMATION

ThefollowinginformationwasextractedfromthebudgetofMary'sManufacturersfortheperiodJulyto

December 2021:

1. Total production and sales 2 300 units

2. Selling price per unit R200

3. Variable manufacturing costs per unit:

Direct materials R60

Direct labour R40

Overheads R20

4. Fixed manufacturing overheads R200 000

5. Other costs:

Fixed marketing and administrative costs R100 000

Sales commission 10% of sales

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