Reference no: EM132602740
Patel Ltd is a small start-up family-owned business that manufactures and sells a single product to customers in UK. The company has recently been approached by a UK university for an order of 75,000 office sets (easy desk & chair) for the opening of four new campuses, which is expected to be their total sales for the year.
The CEO is currently reviewing the following information for this order:
Cost per unit
£
Direct materials per chair 13
Direct labour per chair 9
Variable selling & distribution cost 5
Other variable production overhead 3
Total fixed cost 360,000
The CEO is evaluating the possibility of pricing £36 per office set.
The CEO has noticed the following details on the actual total fixed costs for the year ended 30 June 2019 and is keen to know the impact on profit if product is valued at either marginal cost or full cost (absorption cost):
£
Factory Rent 46,000
Factory Power Consumption 40,000
Factory Wages 120,000
Storeroom Wages 36,000
Depreciation of factory equipment 28,000
Advertising Expenses 38,000
Administrative Expenses 32,000
Fixed selling & distribution cost 20,000
Total 360,000
The budgeted and actual production units for the year are as follow, with no opening inventory:
Production units
Budgeted 90,000
Actual 91,000
Question 1: Prepare a statement of profit or loss for Patel Ltd for the year ended 30 June 2019 using absorption costing, assuming budgeted fixed overheads are equal to the actual fixed overhead. Explain how net profit figures are different under marginal and absorption costing. All workings must be clearly shown.