# Prepare statements to show the profit earned in each of Years 2 and 3 using (i) Marginal Costing (ii) Absorption Costing

7. Emily Enterprises manufactures a single product ‘Little Darling’. The following

data apply to Years 1, 2 and 3.

Little Darling

(per Unit)

Selling Price £45

Costs:

Direct Materials £10

Direct Labour £10

Variable Costs £5

Fixed costs are £4 per unit at the normal production level of 8,000 per annum.

Units

Closing Stock

Year 1 800

Sales

Year 2 7,000

Year 3 9,000

Production

Year 2 6,400

Year 3 9,400

Actual Annual Fixed Costs

Year 2 £33,000

Year 3 £31,000

(a) Prepare statements to show the profit earned in each of Years 2 and 3 using:

(i) Marginal Costing;

(ii) Absorption Costing.

You should indicate the over or under-absorption of Fixed Costs where

necessary.

In Year 4 Emily wishes to increase her sales to 10,000 units and earn a minimum of

£160,000 profit (using marginal costing).

She plans to:

• reduce her selling price to £40;

• reduce stocks to 400 units;

• employ efficiency measures to reduce the marginal cost per unit of

production.

Fixed costs in Year 4 are expected to be £40,000.

(b) (i) Assuming Emily proceeds with the above plan, calculate, using marginal

costing, the profit she can expect to make in Year 4 before employing

efficiency measures to reduce marginal costs.

(ii) Calculate the saving per unit in marginal costs which would be required

to achieve Emily’s target profit of £160,000 in Year 4.

(Your answer should be given to the nearest 1p)

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