Assume that two companies have exactly the same pattern of costs and revenue and both use FIFO when valuing inventory, but that Lima Ltd uses a marginal costing approach to the valuation of inventory in its financial statements, while Delfina Ltd values its inventory using absorption costing. Calculate the gross profit for each company in each of their first three years in business from the following information:
(a) Total fixed indirect manufacturing cost is £60,000 per year.
(b) Direct labour costs over each of the three years were £8 per unit.
(c) Direct material costs over each of the three years were £12 per unit.
(d) Variable expenses which vary in direct ratio to production were £10 per unit.
(e) Sales were: Year 1: 2,400 units; Year 2: 3,600 units; Year 3: 3,000 units.
The selling price remained constant at £120 per unit.
(f) Production is at the rate of: Year 1: 3,200 units; Year 2: 4,000 units; Year 3: 3,400 units.