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Accounting For Managers - Management Accounting-Marginal Costing

Introduction Of A New Product-Application Of Marginal Costing

   Posted On :  02.05.2018 11:22 pm

Sometimes, a product may be added to the existing lines of products with a view to utilise idle facilities, to capture a new market or for any other purpose.

1.  Introduction Of A New Product
 
 
Sometimes, a product may be added to the existing lines of products with a view to utilise idle facilities, to capture a new market or for any other purpose. The profitability of this new product has to be found out initially. Usually, the new product will be manufactured if it is capable of contributing something toward fixed costs and profit after meeting its variable costs.
 
Illustration 5:
 
 
A concern manufacturing product x has provided the following information:

 

Rs.

Sales

75,000

Direct materials

30,000

Direct labour

10,000

Variable overhead

10,000

Fixed overhead

15,000

 
In order to increase its sales by rs.25,000, the concern wants to introduce the product y, and estimates the costs in connection therewith as under:
 

Direct materials

10,000

Direct labour

8,000

Variable overhead

5,000

Fixed overhead                                  Nil 
Advise whether the product Y will be profitable or not.
 
Solution:
 

Commentary: if product Y is introduced, the profitability of product X is not affected in any manner. On the other hand, product Y provides a contribution of Rs.2,000 Towards fixed cost and profit. Therefore, Y should be introduced.

 

Tags : Accounting For Managers - Management Accounting-Marginal Costing
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