Reference no: EM132763469
Question - XYZ Ltd. Carries on its business in Nairobi. The company has been reporting its profits using absorption costing system. During the financial year ended 30 September 2020, the following summary statement was provided:
Sales (4,000 units) 5,000,000
Production cost of sales:
Variable 3,000,000
Fixed 1,000,000 (4,000,000)
Gross profit 1,000,000
Expenses:
Variable 800,000
Fixed (800,000) (1,600,000)
Net loss (600,000)
Currently the company is implementing strategies to improve its profitability, which are to be implemented in two phases: A and B. Each phase will cover a period of six months.
The expected production and sales in units for each of the phases are shown below:
Phase A units Phase B Units
Production 2,500 3,000
Sales 2,400 2,900
The fixed costs are expected to increase by 20% while the variable costs per unit will remain as they were in the previous period. The selling price per unit will be Shs. 1,500.
Required -
(a) Profit and loss statements for phases A and B using:
(i) Marginal costing.
(ii) Absorption costing
(b) Briefly explain the differences resulting from the two methods employed in (a) above of reporting profits.
(c) What will be the break even point in each phase.