Page 248 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 12: Decisions Involving Alternative Choices

Solution: Notes

The information contained in the budget may be rearranged in the form of a marginal cost
statement as shown given.
Marginal Cost Statement
Particulars Total Product X Product Y Product Z
Sales 4,20,000 80,000 2,50,000 90,000
Variable Costs:
Factory Cost 2,90,500 40,000 1,74,000 76,500
Selling and Admn. Cost 35,000 14,000 14,000 7,000
Total Marginal Cost 3,25,500 54,000 1,88,000 83,500
Contribution 94,500 26,000 62,000 6,500
Fixed Costs 37,500 8,500 19,200 9,800
Profi t 57,000 17,500 42,800 –3,300 (loss)
Profi t-Volume Ratio 22.5% 32.5% 24.8% 7.2%
Profit-Volume (P/V) ratio is the ratio of contribution to sales. It is expressed in terms of

percentage. After preparing the above statement and analysis, we can make the following
recommendations:
As discussed in the marginal cost statement, the contribution of product Z is ` 6,500 which goes
toward the recovery of fixed cost of ` 9,800. If the production of product Z is discontinued, the

company will lose the marginal contribution of ` 6,500 while it will have to incur the fixed cost of
` 9,800. The total profi t of ` 57,000 will be reduced to ` 50,500 (57,000 - 6,500). Thus, it is advisable
that the production of Z should not be discontinued. As regards the relative profi tability, product
X is more profitable than Y and Z as the P/V ratio in this case is highest. The production and sales

of product X should, therefore, be encouraged.

Self Assessment

Fill in the blanks:
9. Marginal costing technique helps in deciding the ……………… of a product.
10. If the management is to choose some product out of the given ones, then the products
giving the highest ……………… should be chosen and those giving the least should be
discontinued.
11. ……………… is the ratio of contribution to sales.
12. A ……………… decision is possible when the various factors, and relationships between
them, are measurable.
13. A ……………… involves the act of choice and the alternative chosen out of the available
alternatives.
14. ……………… describes the process by which a course of action is selected as the way to
deal with a specifi c problem.

15. If a machinery is required for a specific project and after that project there is no use of the
machinery then company can decide to ……………… the machinery for that project.

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