Question

QUESTION 2 (15 Marks)

Maroela (Pty) Ltd is a small perishable grocer operating out of Centurion in Gauteng. It was established nearly 30 years ago. Lately the operation has been under margin & volume pressure from the bigger chain stores operating in the greater Pretoria area. Last month the Maroela had revenues (sales) of R220 000, a C/M ratio of 40% and a M/S ratio of 30%. During the current month, a decrease in sales price and a decrease in fixed costs have resulted in a C/M ratio of 36% and a M/S ratio of 24%.

Assume that variable costs (in Rand) will remain constant. Nett operating margin for last month was 12% & 8,64% in the current month M/S = Margin of safety ratio C/M = Contribution margin ratio

Required

a)The amount revenues (sales) decreased

b)New break-even point (rand)

c)Income during the current month

d) Decrease in fixed costs

e)You are the management accountant of Maroela. Explain the CEO the difference between Absorption Costing & Variable Costing and the usage of both methods in the case of Maroela 3

Answer 1

Answer with full working notes is given below

$13,750 a) Amount of Revenue decreased $156,750 New Break Even point b) (Fixed Cost/Contribution Margin ratio) Income during the current month $17,820 c) $5,170 Decrease in Fixed Cost d) e) Absorption Costing and Variable Costing Absorption Costing Absorption Costing is a method of Cost Accounting which includes both variable and fixed manufacturing cost in Cost of Goods Sold. It means Closing stock will be valued at Variable cost and Fixed manufacturing cost allocated to production. Hence Closing stock valuation under Absorption Costing will be higher than Variable Costing. Sales minus Cost of Goods sold gives Gross Profit. Selling and administration expenses are deducted from Gross Profit to arrive at Net Operating Income Variable Costing In Case of Variable Costing - Cost of Goods sold includes only Variable cost of manufacturing. Fixed manufacturing cost is charged off to the period in which it is incurred. Contribution Margin is calculated by deducting Variable Cost (Both production and selling and administration) from Sales. Fixed Cost is deducted from the Contribution Margin to arrive at Net Operating Income Working note Revenues $220,000 Contribution margin % Variable Cost 40% 60% $220,000 $132,000 $88,000 $61,600 $26,400 Revenues Variable Cost 60% Contribution Fixed Cost Profit Profit margin as % of Sales 12% Profit MOS x Contribution Margin Ratio 30% $66,000 Margin of Safety MOS Sales Contribution margin % Profit (MOS Sales X CM Ratio) 40% $26,400 Current Year Contribution Margin % 36% $132,000 $206,250 Variable cost Total Sales (Variable Cost/(1-CM Ratio) $206,250 $132,000 $74,250 Sales Variable Cost Contribution $56,430 Fixed Cost Profit $17,820 8.64% Profit margin as % of Sales Margin of Safety MOS Sales 24% of Total Sales Profit (MOS Sales X CM Ratio) 24% $49,500 $11,880