Page 405 - PM Integrated Workbook 2018-19

Answers

Admin costs are a central overhead – and therefore they shouldn’t be charged
specifically to any of these products, as the costs will be incurred regardless of
which products we make.

We’re also then told that the selling overheads include $4,500 that is not
specific to any product but shared equally between all 3 products. Again, this
means that we have $1,500 charged incorrectly to each product in terms of
relevant costing principles. Those admin costs are going to be Incurred
regardless of which products we make.

Revised profit and loss statement, using relevant costing principles:
X Y Z

$ $ $

Sales 20,000 35,000 15,000
Cost of sales (4,000) (18,000) (6,000)
Gross profit 16,000 17,000 9,000

Selling overheads (5,500) (7,000) (5,000)
Net profit 10,500 10,000 4,000

Less period costs
Fixed costs (12,000)

Admin costs (6,000)
Fixed selling overheads (4,500)

2,000

Conclusion: Z isn’t loss making, but generates net contribution of $4,000
towards operations, and so shouldn’t be discontinued purely on the basis of
the original P&L.

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