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In: Accounting

Mr. Andrews is the CEO of Victoria Ltd. He is quite unhappy as he figured that...

Mr. Andrews is the CEO of Victoria Ltd. He is quite unhappy as he figured that the profits for the last three years were declining despite increasing sales. He approached you to seek advice on the cost accounting numbers and income statement prepared by his accountant. He supplies you the following information:

Particulars

2017

2018

2019

Sales (at $20 per unit)

$1,000,000

1,100,000

$1,200,000

Less: Cost of goods sold

Opening stock

50,000

200,000

250,000

Add: Cost of production

Variable

260,000

240,000

160,000

Fixed (allocated)

390,000

360,000

240,000

Less: Closing stock

200,000

250,000

50,000

Cost of goods sold (before adjusting for

500,000

550,000

600,000

production volume variance)

Adjustment for production volume variance

(30,000)

0

120,000

Actual Cost of goods sold (after adjustment

470,000

550,000

720,000

for production volume variance)

Gross profit

530,000

550,000

480,000

Less: Selling expenses (semi-variable)

490,000

530,000

570,000

Operating profit / (loss)

40,000

20,000

(90,000)

Actual production for the last three years was as follows.     2017: 65,000 units, 2018: 60,000

units, and 2019: 40,000 units. The opening stock as of 1st January 2017 was 5,000 units. Fixed manufacturing overheads were allocated to production based on budgeted activity of 60,000 units every year. Actual fixed overheads for each of the three years was $360,000 (per annum).

Required:

  1. Prepare a marginal costing income statement which would help you understand the performance of Victoria Ltd.
  1. Calculate and advise Mr. Andrews of the breakeven point for Victoria Ltd.
  1. Prepare a numerical reconciliation of the profit numbers that you calculated in requirement (a) and the profit numbers calculated by Victoria Ltd’s accountant.
  1. In order to help Mr. Andrews better understand the financial affairs of this business, explain the reasons in two brief points about the differences in profit numbers obtained from your marginal costing calculations and the profit numbers calculated by Victoria Ltd’s accountant.

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