Answer:
(a) Marginal Cost Statement:
Product A:
Revenue: Sh.15.00
Material: Sh.5.00
Labour: (25% of Sh.4.00) Sh.1.00
Variable Overhead: (50% of Sh.6.50) Sh.3.25
Total Variable Cost: Sh.9.25
Contribution Margin: Sh.5.75
Product B:
Revenue: Sh.12.00
Material: Sh.4.00
Labour: (25% of Sh.3.20) Sh.0.80
Variable Overhead: (50% of Sh.6.00) Sh.3.00
Total Variable Cost: Sh.7.80
Contribution Margin: Sh.4.20
Product C:
Revenue: Sh.11.00
Material: Sh.3.00
Labour: (25% of Sh.2.00) Sh.0.50
Variable Overhead: (50% of Sh.3.60) Sh.1.80
Total Variable Cost: Sh.5.30
Contribution Margin: Sh.5.70
(b) Total Contribution and Profit Statement:
Original Budget:
Product A:
Contribution: (Sh.5.75 x 100,000 units) = Sh.575,000
Fixed Overhead: (1/6 x Sh.150,100) = Sh.25,017
Profit: (Sh.575,000 - Sh.500,000 - Sh.400,000 - Sh.625,000 - Sh.25,017) = (Sh.950,017)
Product B:
Contribution: (Sh.4.20 x 120,000 units) = Sh.504,000
Fixed Overhead: (1/3 x Sh.900,600) = Sh.300,200
Profit: (Sh.504,000 - Sh.480,000 - Sh.384,000 - Sh.600,000 - Sh.300,200) = (Sh.260,200)
Product C:
Contribution: (Sh.5.70 x 80,000 units) = Sh.456,000
Fixed Overhead: (1/4 x Sh.900,600) = Sh.225,150
Profit: (Sh.456,000 - Sh.240,000 - Sh.200,000 - Sh.360,000 - Sh.225,150) = (Sh.569,150)
If Product A is deleted:
Product B:
Contribution: (Sh.4.20 x 120,000 units) = Sh.504,000
Fixed Overhead: (1/2 x Sh.900,600) = Sh.450,300
Profit: (Sh.504,000 - Sh.480,000 - Sh.384,000 - Sh.600,000 - Sh.450,300) = (Sh.510,300)
Product C:
Contribution: (Sh.5.70 x 180,000 units) = Sh.1,026,000
Fixed Overhead: (1/3 x Sh.900,600) = Sh.300,200
Profit: (Sh.1,026,000 - Sh.360,000 - Sh.320,000 - Sh.720,000 - Sh.300,200) = (Sh.325,800)
Based on the above calculations, it is advisable to delete Product A from the product range. This is because the company is making a loss of Sh.950,017 on Product A, which is greater than the total profit made on the other two products (i.e., Sh.829,350). Moreover, increasing
Step-by-step explanation: