Compiling Marginal Income Statement
Jabu manufactures and sells Product X. During the most recent financial period, he sold 500 units at R750 each. There were no units of Product X in opening or closing inventory. Sales people are paid a commission of 5% on sales. The following additional information is available for this sales level:
Fixed administrative cost per unit R90.00
Total fixed manufacturing overhead R120 000
Total fixed marketing cost R50 000
Direct material usage per product 2 kg
Direct material price per kilogram R14.50
Total direct labour cost R47 500
Required:
Compile a marginal income statement to determine the break-even units and break-even value.
To compile a marginal income statement, we need to calculate the variable cost per unit and the contribution margin per unit.
Variable cost per unit: Direct material cost = 2 kg x R14.50/kg = R29.00 Direct labour cost = R47,500/500 units = R95.00 Sales commission = 5% x R750 = R37.50
Total variable cost per unit = R29.00 + R95.00 + R37.50 = R161.50
Contribution margin per unit = Sales price per unit – Variable cost per unit = R750 – R161.50 = R588.50
Now we can compile the marginal income statement:
Sales revenue (500 units x R750) R375,000 Variable costs (500 units x R161.50) (R80,750) Contribution margin R294,250
Fixed manufacturing overhead (R120,000) Fixed marketing cost (R50,000) Fixed administrative cost per unit (500 units x R90) (R45,000) Total fixed costs (R215,000)
Operating income R79,250
To calculate the break-even units and break-even value, we can use the contribution margin per unit:
Break-even units = Total fixed costs / Contribution margin per unit Break-even units = R215,000 / R588.50 = 365.08 units (rounded up to 366 units)
Break-even value = Break-even units x Sales price per unit Break-even value = 366 units x R750 = R274,500
Therefore, Jabu needs to sell at least 366 units of Product X to break even, and the break-even value is R274,500.
