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A) From the following information, calculate the amount of profit using Marginal cost technique.

Business/Management

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Answer

a

Profit=Ksh 1,600,000\text{Profit} = \text{Ksh } 1,600,000

Step-by-step solution

3 steps

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Part a· 3 steps

From the following information, calculate the amount of profit using Marginal cost technique.

Fixed cost: Ksh 400,000
Variable cost Per unit: Ksh 10
Selling Price Per unit: Ksh 20
Output level: 200,000 units

  1. Calculate the Contribution Margin per unit.

    Contribution Margin per unit=Selling Price per unit−Variable Cost per unit\text{Contribution Margin per unit} = \text{Selling Price per unit} - \text{Variable Cost per unit} Contribution Margin per unit=Ksh 20−Ksh 10=Ksh 10\text{Contribution Margin per unit} = \text{Ksh } 20 - \text{Ksh } 10 = \text{Ksh } 10

  2. Calculate the Total Contribution Margin.

    Total Contribution Margin=Contribution Margin per unit×Output level\text{Total Contribution Margin} = \text{Contribution Margin per unit} \times \text{Output level} Total Contribution Margin=Ksh 10 per unit×200,000 units=Ksh 2,000,000\text{Total Contribution Margin} = \text{Ksh } 10 \text{ per unit} \times 200,000 \text{ units} = \text{Ksh } 2,000,000

  3. Calculate the Profit.

    Profit=Total Contribution Margin−Fixed Cost\text{Profit} = \text{Total Contribution Margin} - \text{Fixed Cost} Profit=Ksh 2,000,000−Ksh 400,000=Ksh 1,600,000\text{Profit} = \text{Ksh } 2,000,000 - \text{Ksh } 400,000 = \text{Ksh } 1,600,000 Profit=Ksh 1,600,000\boxed{\text{Profit} = \text{Ksh } 1,600,000}

Part b

Outline any three importance of absorption costing (3 marks).

  1. External Reporting Compliance: Absorption costing is required for external financial reporting under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) because it includes all manufacturing costs in inventory.
  2. Full Cost Recovery: It ensures that all manufacturing costs, both fixed and variable, are considered when determining product costs, which is essential for long-term pricing decisions and ensuring that all costs are eventually recovered.
  3. Inventory Valuation: It provides a more comprehensive valuation of inventory on the balance sheet by including a portion of fixed manufacturing overhead in the cost of inventory.
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