Absorption and Marginal Costing

HKDSE (2017, 6) (Cost-Volume-profit analysis)

Nice Company commenced business on 1 January 2016. It produces a single product, M1. The income statement for
the year ended 31 December 2016 was as follows:

$ $
Sales (9600 units) 2,400,000
Less: Cost of goods sold
Direct materials 300,000
Direct labour 600,000
Fixed production overheads 930,000
1,830,000
Less: Closing inventory (2400 units) 366,000
1,464,000
Add: Under-absorbed fixed production overheads 15,000 1,479,000
Gross profit 921,000

Less: Selling and administrative overheads

— fixed 360,000
— Variable (include sales commission only) 240,000 600,000
Net profit 321,000

REQUIRED:
(a) Calculate the contribution margin per unit of M1.
(b) Calculate the breakeven sales amount for 2016.

Nice Company is considering producing an advanced model ‘Super-M’ in 2018. If Nice Company produces both M1 and
‘Super-M’, the production information is estimated as follows:

M1 Super-M
Annual production 5,000 units 7,000 units
1 1
Direct labour hour required per unit 10 hour 6 hour
4 2
Machine hour required per unit 5 hour 3 hour

Fixed production overheads of 2018 are budgeted at $988,000, which mainly covers factory rent, machine
maintenance and depreciation for machinery.

REQUIRED:
(c) Calculate the predetermined fixed production overhead absorption rate (to 2 decimal places) for each unit of M1
and ‘Super-M’ respectively, using the following cost absorption bases:
(i) direct labour hours
(ii) machine hours

(d) Briefly explain which cost absorption basis, direct labour hours or machine hours, would you recommend to Nice
Company.

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(a)
The contribution margin per unit of M1
Per unit
$
Selling price ($2,400,000/ 9,600) 250
Less Variable costs:
Direct materials [$300,000 / (9,600 + 2,400)] 25
Direct labour [$600,000 / (9,600 + 2,400)] 50
Sales commission (240,000 / 9,600) 25
Contribution per unit 150

(b) Total actual fixed costs = 930,000 + 15,000 + 360,000 = 1,305,000

The breakeven sales unit for 2016 = 1,305,000 / 150 = 8,700 units
The breakeven sales amount for 2016 = 8,700 x 250 = $2,175,000

(c) (i) The predetermined fixed production overhead absorption rate per direct labour hour
= $988,000 / (1/10 x 5,000 + 1/6 x 7,000) = $592.8 per direct labour hour
The predetermined fixed production overhead absorption rate for each unit of M1
= $592.8 x 1/10 = $59.28 per unit
The predetermined fixed production overhead absorption rate for each unit of Super-M
= $592.8 x 1/6 = $98.8 per unit

(ii) The predetermined fixed production overhead absorption rate per machine hour

= $988,000 / (4/5 x 5,000 + 2/3 x 7,000) = $114 per machine hour

The predetermined fixed production overhead absorption rate for each unit of M1

= $114 x 4/5 = $91.2 per unit

The predetermined fixed production overhead absorption rate for each unit of Super-M

= $114 x 2/3 = $76 per unit

(d) — I would recommend machine hours as the cost absorption basis to Nice Company.
— As production requires much more machine hours than direct labour hour, machine hours are
a stronger cost driver of manufacture overheads.

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HKDSE (2016, 7) (Absorption and Marginal costing)
Anson Company started to manufacture a toy plane, ‘Hippo’, as its only product line in 2015. It uses the absorption
costing system. The cost information for ‘Hippo’ is given below:

$/unit
Direct materials 18
Direct labour 12
Total manufacturing overheads 6

(i) The total manufacturing overheads include both variable and fixed manufacturing overheads, based on the
production of 10,000 units of ‘Hippo’ each year.

(ii) Fixed manufacturing overheads for 2015 were estimated to be $40,000, which was the same as the actual
amount.

(iii) The company hired two salesmen for a total annual salary of $128,000 to sell ‘Hippo’. On top of the salary, there
was an incentive payment to the salesmen of 5% of sales

(iv) ‘Hippo’ was sold at a selling price of $60 per unit.

(v) The actual production and sales of ‘Hippo’ for 2015 were 10,000 units and 9,000 units respectively.

The company is considering using the marginal costing system.

REQUIRED:
(a) Prepare for Anson Company the income statement for the year ended 31 December 2015 using the marginal
costing system. Show separately the contribution and the net profit.

(b) (i) Calculate the amounts of inventory as at 31 December 2015 under the marginal and absorption costing
systems respectively.
(ii) Explain the reason for the difference in the amounts of inventory in (b)(i) above.

(c) Compare the net profits of 2015 under the marginal and absorption costing systems.

(a)
Anson Company
Income Statement for the year ended 31 December 2015 using marginal costing
$ $
Sales (9,000  $60) 540,000
Less: Variable cost of goods sold:
Direct materials (10,000 × $18) 180,000
Direct labour (10,000 × $12) 120,000
Variable manufacturing overheads (10,000 × $2) (W1) 20,000
320,000
Less Closing inventory [1,000 x (320,000 ÷ 10,000)] (32,000) 288,000
Product contribution margin 252,000
Less Variable non-manufacturing overheads ($540,000 x 5%) 27,000
Total contribution margin 225,000
Less: Fixed manufacturing overheads 40,000
Fixed non-manufacturing overheads 128,000 168,000
Net profit 57,000

Variable production overheads per unit = (10,000 x 6 – 40,000)/10,000 = $2

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(b) (i) Under the marginal costing system,
The amounts of inventory as at 31 December 2015 = $32,000
Under the absorption costing system,
The amounts of inventory as at 31 December 2015 = $32,000 + 1,000 x $40,000/10,000 = $36,000

(ii) Under marginal costing, only variable costs are included in the cost of production and the fixed
manufacturing overheads are written off as period costs. However, under absorption costing, fixed
and variable manufacturing overheads are both recognized as the cost of production, thus the
fixed manufacturing overheads will be absorbed by the closing inventory.

(c) The difference in closing inventory under the marginal and absorption costing
= $36,000  $32,000 = $4,000
The net profit of 2015 under absorption costing is higher than that under marginal costing by $4,000.

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HKDSE (2015, 3) (Absorption and Marginal costing)
Ivan Company had the following cost information for 2014:
Beginning inventories: $
Direct materials 30 000
Work in progress 18 000
Finished goods 48 000
Carriage inwards on direct materials 20 000
Direct materials purchases 140 000
Direct labour 380 000
Ending inventories:
Direct materials 55 000
Work in progress 33 000
Finished goods 38 000
Production overheads 330 000

REQUIRED:
Calculate the following items for 2014:
(a) Cost of direct materials consumed
(b) Prime cost
(c) Cost of goods manufactured
(d) Cost of goods sold

(a) Cost of direct materials consumed

= Opening inventory of Direct materials + Direct materials purchases + Carriage inwards on direct materials
Closing inventory of Direct materials
= $30,000 + $140,000 + $20,000  $55,000 = $135,000

(b) Prime cost = Cost of direct materials consumed + Direct labour

= $135,000 + $380,000
= $515,000

(c) Cost of goods manufactured

= Prime cost + Production overheads + Opening work-in-progress  Closing work-in-progress
= $515,000 + $330,000 + $18,000 $33,000
= $830,000

(d) Cost of goods sold = Cost of goods manufactured + Opening Finished goods  Closing Finished goods
= $830,000 + $48,000  $38,000
= $840 000

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HKDSE (2014, 7) (Absorption and Marginal costing)
Goodwork Company uses the job costing system and applies a plant-wide production overhead absorption rate based
on direct labour hours. The predetermined rate for the year ended 31 March 2014 was $7.0 per direct labour hour. The
actual total production overheads and total direct labour hours for the year were $1,100,000 and 180,000 hours
respectively.

REQUIRED:
(a) Calculate the under- or over-absorption of production overheads of Goodwork Company for the year ended 31
March 2014.
(b) Despite the inevitable occurrence of under- or over-absorption of production overheads, a predetermined
overhead rate is more commonly used than an absorption rate based on actual data. Explain why.

The following data relate to the two production departments of Goodwork Company for the coming year, which will
end on 31 March 2015:

Department A Department B
Total material cost $300,000 $100,000
(of which 30% is direct materials)
Total labour cost $820,000 $530,000
(of which 80% is direct labour)
Factory depreciation $339,000 $66,000
Other indirect expenses $126,000 $24,000

Normal activity (direct labour hours) 100,000 hours 70,000 hours

REQUIRED:
(c) Calculate (to one decimal place) the plant-wide production overhead absorption rate of Goodwork Company for
the year ending on 31 March 2015.

Two job orders, Job #103 and Job#104, have been scheduled for the coming year. The direct labour usage is estimated
as follows:

Department A Department B
Job #103 1,000 hours 3,000 hours
Job #104 3,300 hours 1,100 hours

REQUIRED:
(d) Calculate the overhead cost to be assigned to each of the two job orders using the plant-wide production
overhead absorption rate obtained in (c) above.

Goodwork’s plant manager heard that departmental production overhead absorption rates could be better for cost
assignment than a plant-wide rate.

REQUIRED:
(e) Based on the estimated direct labour usage of job #103 and Job #104 above, explain whether departmental
overhead rates or a plant-wide rate will provide a fairer overhead assignment. Support your answer with
calculations.

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HKDSE (2014, 7) (Job Costing)
(a) The predetermined total production overhead = 180,000 x $7.0 = $1,260,000
The actual total production overheads = $1,100,000
The over-absorption of production overheads = $1,260,000  $1,100,000 = $160,000

(b) Some overheads cannot be ascertained until the end of a year, e.g., depreciation, year-end bonuses.
Many businesses do not wait until all the overheads are ascertained at the end of a year. Therefore, a
predetermined overhead rate is more commonly used than an absorption rate based on actual data

(c)
Department A Department B
Indirect material cost $210,000 $70,000
Indirect labour cost $164,000 $106,000
Factory depreciation $339,000 $66,000
Other indirect expenses $126,000 $24,000
Total production overhead $839,000 $266,000

The plant-wide production overhead absorption rate = ($839,000 + $266,000) / (100,000 + 70,000)
= $6.5 per direct labour hour

(d) The overhead cost of Job #103 = $6.5 x (1,000 + 3,000) = $26,000
The overhead cost of Job #104 = $6.5 x (3,300 + 1,100) = $28,600

(e) Under the departmental overhead rates,

The production overhead absorption rate of Department A = $839,000 / 100,000
= $8.39 per direct labour hour
The production overhead absorption rate of Department B = $266,000 / 70,000
= $3.8 per direct labour hour

The production overhead absorption rate of Department A is much higher than Department B and the
direct labour hour usage of Job #104 in Department A is much higher than Job #103. Hence, the
departmental overhead rates will provide a fairer overhead assignment than the plant-wide rate.

The overhead cost of Job #103 = $8.39 x 1,000 + $3.8 x 3,000 = $19,790
The overhead cost of Job #104 = $8.39 x 3,300 + $3.8 x 1,100 = $31,867

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HKDSE (2013, 3) (Absorption and Marginal costing)
Hansan Ltd undertakes electrical work according to customers’ requirements. It has prepared the following budgeted
information for the year 2014:
Direct material cost 500,000
Direct labour cost 2,850,000
$
Production overheads 780,000
Administrative overheads 400,000

Budgeted activity levels include:

Machine hours 5,000 hours
Direct labour hours 60,000 hours
Hansan Ltd uses a plant-wide predetermined production overhead absorption rate based on direct labour hours to
allocate production overheads to jobs.
REQUIRED:
(a) Calculate the predetermined production overhead absorption rate for the year 2014.
(b) State one rationale for Hansan Ltd’s choice of using the existing absorption base to calculate its predetermined
production overhead absorption rate.
The company has to price a job that would be started and completed in 2014. Information relating to the job is as
follows:
(i) Direct materials: $250 per metre. 100 metres are required.
(ii) Direct labour – Electricians: $60 per hour. 200 hours are required.
– Apprentices: $35 per hour. 300 hours are required.
Administrative overheads are allocated to the job based on 25% of production cost. The company maintains a net profit
margin of 50%.
REQUIRED:
(c) Calculate the selling price of this job, showing separately the amount of:
– prime cost
– production cost
– total cost

HKDSE (2013, 3) (Job Accounting)

(a) The predetermined production overhead absorption rate = $780,000 / 60,000 hours
= $13 per direct labour hours

(b) As production of jobs in the company is labour-intensive the best measure of overhead resources
consumed by each job is direct labour hours

Since the company is a electrical work company, it uses much labour to carry the work. This can be
shown on the information of direct labour cost. The amount of the cost is greater than other cost very
much. Therefore, use direct labour hours as the absorption base is suitable for the company.

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(c)
Job cost card
$ $
Direct materials ($250 x 100) 25,000
Direct labour ($60 x 200 + $35 x 300)
Electricians ($60 x 200) 12,000
Apprentices ($35 x 300) 10,500 22,500
Prime cost 47,500
Production overhead ($13 x 500) 6,500
Production cost 54,000
Administrative overheads (54,000 x 25%) 13,500
Total cost 67,500
Profit 67,500
Selling price 135,000

$ $
Prime cost
Direct materials ($250 x 100) 25,000
Direct labour ($60 x 200 + $35 x 300) 22,500 47,500
Production overhead ($13 x 500) 6,500
Production cost 54,000
Administrative overheads (54,000 x 25%) 13,500
Total cost 67,500
Selling price (67,500 / 50%) 135,000

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HKDSE (2012, 4) (Absorption and marginal Costing)
Magic Company manufactures and sells a single product, Product X. For the purpose of preparing the budget for
Product X for the month of November 2012, the following information is provided:
(i) The budgeted production and budgeted sales for the month are 5000 and 4400 units respectively.
(ii) The expected selling price is $300 per unit.
(iii) The direct material cost of the production is $40 per unit. An additional transportation cost of $2 per unit is to be
incurred for the purchase of the direct materials.
(iv) Each unit of product requires 2 hours of direct labour. The hourly rate of direct labour is $60.5.
(v) The production overheads of the product comprise a fixed and a variable element. It is the company’s policy to
apportion variable production overheads in relation to the number of units produced.
Assuming the monthly fixed production overheads of the company remain the same in 2012, the annual budgeted
production overheads will be $1 159 000 if 58 000 units are produced each year, and $1 203 000 if 66 000 units
are produced each year.
(vi) Selling and distribution expenses consist of a sales commission of $8 per unit sold and a fixed monthly distribution
expense of $50 000.
REQUIRED:
Magic Company adopts the marginal costing system. Assume it does not keep any inventories as at 31 October 2012,
calculate the following for Product X for the month ended 30 November 2012:
(a) the budgeted total value of closing inventories
(b) the budgeted total amount of contribution
(c) the budgeted total amount of net profit

(a)
Budgeted total value of closing inventories $
Direct materials cost per unit 40.0
Transportation cost on direct materials per unit 2.0
Direct labour cost per unit ($60.5 x 2) 121.0
Variable production overheads per unit [($1 203 000  $1 159 000) / (66 000 – 58 000)] 5.5
Total variable cost per unit 168.5
Unit of closing inventories (5 000 – 4 400) 600
101 100

(b)
Budgeted total amount of contribution $
Sales price per unit 300
Less Total variable cost per unit 168.5
Sales commissions per unit 8
Contribution per unit 123.5
Number of unit sold 4 400
543 400

(c)
Budgeted total amount of net profit $
Total amount of contribution 543 400
Less Fixed production overhead ($1 159 000  $5.5 x 58 000)/12 70 000
Fixed monthly distribution expense 50 000
423 400

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HKDSE Sample 2 (Paper 2A, 2) (Absorption and marginal Costing)
Perry Ltd started producing Product A on 1 January 2012. The unit selling price and cost of Product A for the month of
January 2012 were as follows:
($/unit)
Selling price 5.90
Direct material 1.20
Direct labour 1.40
Variable production overheads 0.70
Variable selling and administrative expenses 0.15
(i) Fixed production overheads were budgeted at $308,000 per month and were absorbed based on the number of
units produced. Actual fixed production overheads of Product A were the same as the absorbed fixed production
overheads for the month.
(ii) Budgeted production and budgeted sales were the same at 280,000 units per month.
(iii) Actual production and actual sales of Product A for the month were 250,000 units and 220,000 units respectively.
(iv) Actual fixed selling and administrative expenses were $110,000.
(v) There were no closing direct materials and work-in-progress inventories of Product A as at 31 January 2012.

REQUIRED:
(a) Prepare the income statement for the month ended 31 January 2012 using absorption costing.
(b) As compared with the absorption costing system, advise Perry Ltd two advantages of using the marginal costing
system.

(a)
Perry Ltd
Income Statement for the year ended 31 January 2012 using absorption costing
$ $
Sales (220,000  $5.90) 1,298,000
Less: Cost of goods sold:
Direct materials (250,000 × $1.20) 300,000
Direct labour (250,000 × $1.40) 350,000
Variable production overheads (250,000 × $0.70) 175,000
Fixed production overheads absorbed (250,000 × $1.1) 275,000
1,100,000
Less: Closing inventory [(250,000  220,000) x $4.4] 132,000 968,000
Gross profit 330,000
Less: Variable selling and administrative expenses (220,000 x $0.15) 33,000
Fixed selling and administrative expenses 110,000 143,000
Net profit 187,000

Unit fixed production overheads absorbed = $308,000  280,000 = $1.1

Unit production costs under absorption costing = ($1.20 + $1.40 + $0.70 + $1.1) or ($1,100,000  250,000) = $4.4

(b) Advantages:
— inventory valuations will not be distorted by the changes in current year’s fixed costs
— enables the company to concentrate on its controllable aspects by separating its fixed and
variable costs
— helps management to make production and sales decisions with the calculated marginal costs
information

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(a)
Perry Ltd
Income Statement for the year ended 31 January 2012 using marginal costing
$ $
Sales (220,000  $5.90) 1,298,000
Less: Cost of goods sold:
Direct materials (250,000 × $1.20) 300,000
Direct labour (250,000 × $1.40) 350,000
Variable production overheads (250,000 × $0.70) 175,000
825,000
Less: Closing inventory [(250,000  220,000) x $3.3] 99,000 726,000
Product contribution margin 572,000
Less: Variable selling and administrative expenses (220,000 x $0.15) 33,000
Contribution 539,000
Less: Fixed production overheads absorbed (250,000 × $1.1) 275,000
Fixed selling and administrative expenses 110,000 385,000
Net profit 154,000

Unit fixed production overheads absorbed = $308,000  280,000 = $1.1

Unit production costs under absorption costing = $825,000  250,000 = $3.3

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HKDSE (sample, 3) (Absorption and marginal costing)
Lau Yan Manufacturing Company has extracted the following information as at 31 December 20X6
$
Inventories as at 1 January 20X6: Raw materials 40,800
Work in progress 35,000
Finished goods 180,000
Royalties (based on the number of units produced) 89,000
Depreciation charge for the year: Plant and machinery 90,200
Delivery vehicles 897,560
Office equipment 65,377
Direct labour 60,800
Purchase of raw materials 170,000
Factory manager’s salary 57,000
Rent and electricity 112,500
Administrative and selling expenses 87,300
Materials loss due to fire 50,000
Additional information:
(i) At 31 December 20X6, inventories were valued as follows:
$
Raw materials 77,000
Work in progress 52,000
Finished goods 175,000
(ii) It is the company’s policy to apportion two-thirds of the costs common to both the factory and the office to the
cost of production.
(iii) Finished goods are transferred to the sales department at cost plus 10%.

REQUIRED:
(a) Prepare the manufacturing account for the year ended 31 December 20X6
(b) Ascertain each of the following for the year ended 31 December 20X6
(i) Cost of raw materials consumed
(ii) Prime cost
(iii) Production cost of finished goods
(iv) Transfer price of finished goods

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(a) Cost of raw materials consumed = $40,800 + $170,000 – ($77,000 + $50,000) = $83,800

(b) Prime cost = $83,800 + $89,000 + $60,800 = $233,600

(c) Production cost of finished goods

= $233,600 + ($112,500 x 2/3 + $90,200 + $57,000) + $35,000 – $52,000
= $438,800

(d) Transfer price of finished goods = $438,800 x (1 + 10%) = $482,680

Lau Yan Manufacturing Company

Manufacturing Account for the year ended 31 December 20X6
$ $
Opening inventory of raw materials 40,800
Add: Purchases 170,000
210,800
Less: Fire Loss 50,000
160,800
Less Closing inventory of raw materials 77,000
Cost of raw materials consumed 83,800
Direct labour 60,800
Royalties 89,000
Prime cost 233,600
Factory overheads: Rent and electricity ($112,500 x 2/3) 75,000
Depreciation of Plant and machinery 90,200
Factory manager’s salary 57,000 222,200
455,800
Add Opening work-in-progress 35,000
490,800
Less Closing work-in-progress 52,000
Production cost of finished goods 438,800
Mark up (10%) 43,880
Transfer price of finished goods 482,680

(a) Cost of raw materials consumed: $83,800

(b) Prime cost: $233,600
(c) Production cost of finished goods: $438,800
(d) Transfer price of finished goods: $482,680

129
HKDSE (sample, 9) (Absorption and marginal costing)
Mary is a fresh university graduate who has majored in marketing. She is enthusiastic about conducting a business of
her own alongside her full-time employment. She borrowed a sum of $90,000 from a bank at an interest rate of 5% per
annum on 1 January 20X7 to run a shop which sells free-sized T-shirts of her own design.

Information relating to the shop is as follows:

(i) The shop’s rental is $5,000 per month. The annual rates and insurance expenses are $3,600 and $4,500
respectively.

(ii) A shop attendant is hired at a basic salary of $7,000 per month plus a commission of 5% of the sales value.

(iii) All T-shirts are imported from factories based on the Mainland and are sold at 100% mark-up on cost.

(iv) The budgeted sales volume is 500 shirts per month. Mary has made arrangements with the Mainland suppliers for
the supply of 500 shirts each month. Then a logo sticker will be fixed on each shirt by a sewing service provider
nearby at the cost of $2 each. The purchase costs for the first quarter of 20X7 are as follows:

$
January 20X7 22,500
February 20X7 24,000
March 20X7 25,000

(v) In order to publicise her new brand, Mary will print some promotional leaflets to be distributed once a week in
the neighborhood. The printing cost of the leaflets amounts to $500 per month and a part-time worker is hired at
$1,000 per month for the distribution work.

(vi) A point-of-sale system costing $30,000 was purchased to help keep inventory record and cash transactions. In
addition, Mary furnished the shop with necessary furniture and fixtures by spending a further $60,000.
Depreciation is to be calculated at 12% per annum on a reducing balance basis for the point-of-sale system and
10% on cost for the furniture and fixtures.

(vii) The actual sales figures for the first quarter ended 31 March 20X7 are as follows:

Number of shirts
January 20X7 350
February 20X7 420
March 20X7 400

REQUIRED:
(a) Define direct costs and indirect costs and identify one example for each from the case above.

(b) Compare marginal costing with absorption costing with respect to inventory valuation and income determination.

(c) Prepare an income statement for the first quarter ended 31 March 20X7 using the marginal costing method,
assuming the FIFO method is adopted in the valuation of unsold goods.

(d) With the figures you have compiled in (c) above, calculate the breakeven point (in sales dollars) of the first
quarter ended 31 March 20X7.

Noting that there are several giant enterprises in the low-margin garment market, Mary’s father has always persuaded
Mary to discontinue her small business which is unlikely to be competitive enough to survive.

REQUIRED:
(e) Discuss two possible reasons why Mary is still enthusiastic about running a business of her own.

130
 (a) Direct costs – costs that would be economical to trace their cost object
e.g. purchase cost, cost of stickers, sales commission
Indirect costs – costs that would not be economical to trace their cost object
e.g. printing cost, salaries, rent and rates, insurance, depreciation

(b)
Marginal costing Absorption costing
Inventory — Fixed costs are treated as product costs
— Only variable costs are charged to units. and can be carried forward to the next
valuation
period in the value of each unit.
— A proportion of the fixed costs of the
— Fixed costs incurred will not be carried current period will be carried forward to
Income
forward and the profit of the current the next accounting period and therefore
determination
accounting period will be lower. the profit of the current accounting
period will be higher.

(c) Income statement for the first quarter ended 31 March 20X6
$ $
Sales [($22,500 + $24,000 + 170 x $50) x 200%] 110,000
Opening inventories —
Purchases ($22,500 + $24,000 + $25,000) 71,500
Logo stickers (1,500 x $2) 3,000
Less Closing inventories [(500 – 170) x ($50 + $2)] (17,160) 57,340
Product contribution margin 52,660
Less Variable costs: Commission ($110,000 x 5%) 5,500
Contribution 47,160
Less: Fixed costs
Rent and rates ($5,000 x 3 + $3,600 x 3/12) 15,900
Insurance ($4,500 x 3/12) 1,125
Salaries ($7,000 x 3 + $1,000 x 3) 24,000
Printing costs ($500 x 3) 1,500
Depreciation [$30,000 x 12% x 3/12 + $60,000 x 10% x 3/12] 2,400 44,925
Net profit 2,235

(d) Total fixed costs = $44,925

Contribution margin ratio = $47,160  $110,000
Breakeven sales dollars = Fixed cost  Contribution margin ratio
= $44,925 / ($47,160  $110,000) = $104,787

(e) — a platform for self-actualization: the business provides an outlet for Mary to introduce products of
her own design
— a form of investment: the rate of return on her business has reached 8%, which is higher than the
market interest rate
— an opportunity for self-development: Mary will acquire management skills by developing her
business strategies and job design in real situations
— a way to serve the public: Mary may target the needs or interests of minority groups that may well
not be served by giant enterprises.

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