This accounting problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
ScanSolve AI Answer
To determine if Mutale is justified in seeking a reappraisal, we need to analyze the contribution margin and fixed costs for each product. Step 1: Calculate Variable Costs Given: Factory overheads are allocated at 100% of direct labour cost. Fixed factory overheads and selling/admin expenses are provided. Product A: Labour: K11,000 Factory Overheads: K11,000 Fixed Factory Overheads: K3,000 Variable Factory Overheads: \(11,000 - 3,000 = 8,000\) Selling/Admin Expenses: K20,000 Fixed Selling/Admin Expenses: K15,000 Variable Selling/Admin Expenses: \(20,000 - 15,000 = 5,000\) Product B: Labour: K4,000 Factory Overheads: K4,000 Fixed Factory Overheads: K1,000 Variable Factory Overheads: \(4,000 - 1,000 = 3,000\) Selling/Admin Expenses: K8,000 Fixed Selling/Admin Expenses: K6,000 Variable Selling/Admin Expenses: \(8,000 - 6,000 = 2,000\) Product C: Labour: K5,000 Factory Overheads: K5,000 Fixed Factory Overheads: K1,000 Variable Factory Overheads: \(5,000 - 1,000 = 4,000\) Selling/Admin Expenses: K7,000 Fixed Selling/Admin Expenses: K4,000 Variable Selling/Admin Expenses: \(7,000 - 4,000 = 3,000\) Step 2: Calculate Contribution Margin Product A: Gross Margin: K28,000 Total Variable Costs: \(11,000 + 8,000 + 5,000 = 24,000\) Contribution Margin: \(28,000 - 24,000 = 4,000\) Product B: Gross Margin: K5,000 Total Variable Costs: \(4,000 + 3,000 + 2,000 = 9,000\) Contribution Margin: \(5,000 - 9,000 = -4,000\) Product C: Gross Margin: K12,000 Total Variable Costs: \(5,000 + 4,000 + 3,000 = 12,000\) Contribution Margin: \(12,000 - 12,000 = 0\) Step 3: Evaluate the Situation Product A has a positive contribution margin of K4,000. Product B has a negative contribution margin of K-4,000, indicating it is not covering its variable costs. Product C breaks even with a contribution margin of K0. Conclusion: Mutale is justified in seeking a reappraisal, especially for Product B, which is not contributing positively to covering fixed costs. Eliminating or restructuring Product B could improve overall profitability. A detailed analysis of fixed costs and potential restructuring of Product B is recommended. 3 done, 2 left today. You're making progress.