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Marginal Costing


Norfolk Ltd is specialized in producing and selling air conditions. In 2012, the manufacturing cost per unit included: £ Direct material 200 Direct labor (20 minutes per unit) 90/hour Variable manufacturing overhead 30 Variable selling expenses 50 Variable administrative expenses 10 Fixed costs for the year ended 31 December 2012 were: £000 Fixed manufacturing 1,500 Fixed selling and distribution 1,700 Fixed administrative 800 The company produced and sold 275,000 units at £400 per unit. In 2013, management has decided to increase the selling price by 15% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £2,440,000 in fixed costs in 2013. The company has produced and sold the same quantity in 2013 as last year. 1) Calculate the break-even point in units for the two years 2012 and 2013 and comment on the results (10%) 2) Calculate the safety margin for both years and comment on the results (5%) 3) In the light of your answer to the previous two points, evaluate the company’s policy in increasing the price by 15% in 2013 (5%).