Question

Q1 a) M Ltd manufactures a single product which it sells for K9 per unit. Fixed costs
are K54, 000 per month and the product has a variable cost of K6 per unit in a
period when actual sales were K180, 000. Calculate M Ltd´s marginal of
safety in units.

b). For forthcoming year, G plc,s variable costs are budgeted to be 60 percent of
the sales value and fixed costs are budgeted to be 10 percent of sales value.
If G plc increases its selling prices by 10 percent, but if fixed costs, variable
costs per unit and sales volume remain unchanged the effect , calculate the
effect of G plc´s contribution in percentage.
.c) Mukwa plc has a contribution/sales ratio of 50 percent and fixed cost of K35,
000. Calculate its breakeven point in revenue. If Mukwa plc selling price per
unit is K35, calculate the company´s breakeven point in units.
d) Namushi Limted had opening inventory value of K2, 640 (320 units valued at
K8.25 each) on 1 May. The following receipts and issues were recorded
during May:
10 May Receipt 1,100 units K8.75 per unit
24 May Receipt 620 units K9.10 per unit
30 May issues 1,800 units
1) What was the total value of the issues on 30 May using:
i. LIFO method
ii. FIFO method
iii. AVCO method
2) What was the value of closing inventory using:
i. LIFO method
ii. FIFO method
iii. AVCO method

Answer 1

Solution

Q1. A MLtd

Computation of margin of safety in units:

Margin of safety in units = actual sales units – break-even sales in units

Actual sales, units = 180,000/9 = 20,000 units

Break-even units = fixed cost/contribution margin per unit

Fixed cost = 54,000

Contribution margin per unit = selling price per unit – variable cost per unit

= 9 – 6 = 3 per unit

Break-even point in units = 54,000/3 = 18,000 units

Margin of safety, units = 20,000 – 18,000 = 2,000 units

1. G plc

Variable cost = 60% of sales value

Assuming sales price = 100, variable cost = 60

Increase in selling price by 10%, new selling price = 110

Variable cost = 110 x 60% = 66

Contribution margin = 44

Contribution margin percentage = 40%

2. Mukwa plc

Contribution margin ratio = 50%

Fixed cost = 35,000

Break-even point in revenue = fixed cost/contribution margin ratio

= 35,000/50% = 70,000

Break-even point in revenue = 70,000

Selling price per unit = 35

Break-even point in units = 70,000/35 = 2,000 units

Break-even point in units = 2,000

3. 1. Determination of total value of issues on May 30 using LIFO:

The LIFO method assumes that issues are recorded at latest prices.

May 30 issues of 1,800 units comprise,

May 24 receipt of 620 units at 9.10 per unit – 620 x 9.10 = 5,642

May 10 receipt of 1,100 units at 8.75 per unit – 1,100 x 8.75 = 9,625

Remaining 80 units from beginning inventory at 8.25 each = 80 x 8.25 = 660

Total value of issues on May 30 using LIFO method = 15,927

Value of closing inventory using LIFO method –

Closing inventory = total units – issued units

= (320 + 1,100 + 620) – 1,800 = 240 units

Since all the issues are valued at latest prices, the closing inventory consists of beginning inventory.

Hence, value of 240 closing inventory = 240 x 8.25 = 1,980

1. Determination of total value of issue on May 30 using FIFO method:

the FIFO method assumes that issues consist of items that are already lying in stock.

The May 30 issue of 1,800 units comprise,

320 units from beginning inventory at 8.25 = 2,640

May 10 receipt of 1,100 units at 8.75 = 1,100 x 8.75 = 9,625

Remaining 380 units (1,800 – 320 – 1,100), are from May 24 receipts at 9.10 = 380 x 9.10 = 3,458

Total cost of issues on May 30 using FIFO = 15,723

Value of closing inventory using FIFO method –

Closing inventory = total units – issued units

= (320 + 1,100 + 620) – 1,800 = 240 units

Since, all issues are valued at earlier prices, the closing inventory is valued at latest prices.

Value of 240 closing units = 240 x 9.10 = 2,184

2. Average cost method –

Average cost per unit = total cost of inventory/number of units

Total cost of inventory = (320 x 8.25 + 1,100 x 8.75 + 620 x 9.10) = 17,907

Units available = 2,040

Average cost per unit = 17,907/2,040 = 8.78 per unit

Cost of issues = 1,800 units x 8..78 = 15,800

Value of closing inventory at average cost method –

Closing inventory in units = 2,040 – 1,800 = 240

Value of closing inventory = 240 x 8.78= 2,107