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4 D Limited is a manufacturing company.
(a) Explain two uses of absorption costing.
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Additional information
D Limited uses marginal costing. At one of its factories a single type of product is made. The
following budgeted information is available.
Per unit $
Selling price 92
Direct materials 33
Direct labour 39
Fixed costs 8
The factory has a budgeted capacity of 15 000 units per month.
(b) Calculate the monthly break-even point in units.
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Additional information
It was forecast that only 4920 units would be sold in January 2024.
(c) Calculate the forecast profit or loss for January 2024.
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Additional information
The directors have set a target profit of $150 000 per month.
(d) Calculate the number of units to be sold in order to achieve the target profit.
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Additional information
At another factory of D Limited a single different type of product is made. The following budgeted
details are available for one month’s production:
Per unit $
Direct materials 16
Direct labour 17
Other variable costs 3
Contribution 24
Normal capacity at this factory is 18 000 units per month. Recently, the factory has been operating
at 80% capacity and this has resulted in a monthly profit of $150 600.
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The directors have been informed that a major competitor manufacturing the same product plans
to stop production. The directors plan to take advantage of the situation and are considering two
options.
Option A
1 Increase monthly production by 6000 units on current output levels.
2 Sell all production at a price per unit 2% above the current price.
3 Any production above normal factory capacity will require direct labour to be paid an overtime
premium of 50%.
Option B
1 Increase factory capacity to 22 000 units per month.
2 Sell all production at a price per unit 3% above the current price.
3 Suppliers of direct materials will be expected to offer a trade discount of 25% instead of the
current trade discount of 20%.
4 The direct labour rate per unit will be increased to $18.50.
5 Some additional machinery will be purchased at a cost of $120 000. Machinery is depreciated
by 20% per annum, using the straight-line method.
6 An additional $20 000 per month will be spent on advertising.
(e) Calculate the monthly profit to be made from Option A.
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(f) Prepare a monthly marginal costing statement for Option B.
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(g) Advise the directors whether or not they should go ahead with either of these options. Justify
your choice by discussing both financial and non-financial factors.
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[Total: 30]
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