A is the CEO of B Ltd. He is quite unhappy as he figured that the profits for the last three years were declining despite increasing sales. He approached you to seek advice on the cost accounting numbers and income statement prepared by his accountant. He supplies you the following information:
Actual production for the last three years was as follows.
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2017: 65,000 units,
2018: 60,000 units,
2019: 40,000 units.
The opening stock as of 1st January 2017 was 5,000 units. Fixed manufacturing overheads were allocated to production based on budgeted activity of 60,000 units every year. Actual fixed overheads for each of the three years was $360,000 (per annum).
(a) Prepare a marginal costing income statement which would help you understand the performance of Victoria Ltd.
(b) Calculate and advise A of the breakeven point for B Ltd.
(c) Prepare a numerical reconciliation of the profit numbers that you calculated in requirement (a) and the profit numbers calculated by B Ltd’s accountant.
(d) In order to help A better understand the financial affairs of this business, explain the reasons in two brief points about the differences in profit numbers obtained from your marginal costing calculations and the profit numbers calculated by B Ltd’s accountant.