Kampuyu Ltd manufactures and sells a single product at a unit price of K25. In constant-price level terms, its cost structure is as follows: Variable costs: Production materials K10 per unit produced Distribution K1 per unit sold Semi-variable costs: Labour K5,000 per annum, plus K2 per unit produced Fixed costs: Overheads K5,000 per annum For several years, Kampuyu has operated a system of marginal costing for management accounting purposes. It has been decided to review the system and to compare it for management accounting purposes with an absorption costing system. As part of the review, you have been asked to prepare estimates of Kampuyus profits in constant-price-level terms over a three-year period in three different hypothetical situations, and to compare the two types of system generally for management accounting purposes. 2 (a) In each of the following three sets of hypothetical circumstances, calculate Kampuyus profit in each of the three years 2017, 2018 and 2019, and also in total over the three year period 2017 to 2019, using first a marginal costing system and then a full-cost absorption costing system with fixed cost recovery based on a normal production level of 1,000 units per annum: (i) Stable unit level of production, sales and inventory 2017 2018 2019 Opening stock 100 100 100 Production 1,000 1,000 1,000 Sales 1,000 1,000 1,000 Closing stock 100 100 100 (4 marks) (i) Stable unit level of sales, but fluctuating unit levels of production and inventory 2017 2018 2019 Opening stock 100 600 400 Production 1,500 800 700 Sales 1,000 1,000 1,000 Closing stock 600 400 100 (4 marks) (ii) Stable unit level of production, but fluctuating unit levels of sales and inventory 2017 2018 2019 Opening stock 100 600 400 Production 1,000 1,000 1,000 Sales 500 1,200 1,300 Closing stock 600 400 100 (4 marks) (b) Write a short comparative evaluation of marginal and absorption costing systems for management accounting purposes, paying particular attention to profit measurement, and using your answer to (a) to illustrate your arguments if you wish. (8 marks)

total (20 marks)