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 the marginal income statement, we need to calculate the total variable costs per unit and then deduct it from the selling price to obtain the contribution margin per unit. Then, we will deduct the fixed costs to obtain the net income.
Direct material cost per unit = 2 kg × R14.50/kg = R29.00
Direct labour cost per unit = R47 500 ÷ 500 units = R95.00
Variable cost per unit = Direct material cost per unit + Direct labour cost per unit = R29.00 + R95.00 = R124.00
Sales revenue = 500 units × R750 per unit = R375 000
Commission expense = 5% × R375 000 = R18 750
Contribution margin per unit = Selling price per unit – Variable cost per unit = R750 – R124.00 = R626.00
Total contribution margin = Contribution margin per unit × Number of units sold = R626.00 × 500 = R313 000
Total variable costs = Variable cost per unit × Number of units sold = R124.00 × 500 = R62 000
Fixed costs = Fixed administrative cost per unit × Number of units sold + Total fixed manufacturing overhead + Total fixed marketing cost = R90.00 × 500 + R120 000 + R50 000 = R215 000
Net income = Total contribution margin – Total variable costs – Fixed costs – Commission expense = R313 000 – R62 000 – R215 000 – R18 750 = R17 250
Now we can calculate the break-even point:
Break-even units = Fixed costs ÷ Contribution margin per unit = R215 000 ÷ R626.00 = 344 units
Break-even value = Break-even units × Selling price per unit = 344 units × R750 per unit = R258 000
Therefore, Abu needs to sell at least 344 units to break even, and the break-even value is R258 000.
