Required

1. Explain which option (i.e. price of 120, 110 or 100) should be accepted and support your answer with detailed calculations.

2. Outline the possible limitations to your decision, which was made in (1).

Required:

Prepare a comparative gross profit calculation showing the production costs, opening and closing stock valuations and the gross profits for each company using a marginal costing approach for PLD and an absorption costing approach for TCL.

Present your answers to 2 decimal places.

Part A: Task One MGY Ltd produces a black leather jacket, which each sells at 120. The monthly sales volume is 180 jackets. The company is currently considering a price reduction strategy to increase its share of the market. During a recent meeting, the production manager has suggested to reduce the price to 110 per unit and expected the sales would rise to 250 jackets per month. The sales manager is more confident that if the price were further reduced to 100, the turnover would rise to 350 jackets a month. The monthly budget for the production of 180 jackets is: - Direct materials 4,600; direct labour 5,400; selling and distribution expenses (variable) 1,700; and fixed overheads are 1,900 per month. TCL and PLD are two manufacturing companies, which have identical costs and revenues but they use different costing systems for decision-making and stock valuation. TCL uses an absorption costing approach while PLD uses a marginal costing system. You have been given the following information for each of their first two years of operating: - . . All fixed factory overhead is 12,500 per annum. Variable Labour costs over each of the two years are 2.50 per unit Variable Material costs over each of the two years are 3 per unit Variable overheads, which vary in direct ratio to production are 1.00 . per unit. Sales are as follows: Year 1 2 2 Year 9,000 units 7,500 units a The selling price remains constant at 30 per unit. Production is as follows: . Year 1 2 Year 10,000 units 8,500 units a