The summarised income statement for Ravinder Ltd, based on a budgeting selling price per unit is as follows: E E000 Sales 18 per unit 540 Direct material 108 Direct wages 78 Variable overhead 56 Fixed production overhead 80 10 Fixed administration overhead 44 11 Fixed selling overhead 30 12 396 13 Profit 144 14 15 At a recent board meeting the directors discussed various options in order to improve profitability and 16 these are as follows: 17 18 1 In order to take into account the current economic conditions: 19 20 Reduce selling price by 21 12.5% Change sales volumes to 22 44 (000) units 23 2 Increase marketing costs by (8000) 24 10 Increase selling price by 25 22.5% Increase variable overheads by 26 8% Setting a profit margin of 27 35%2 Marginal costing statements Original Proposal 1 Proposal 2 5 Units 000s 30 44 26.813 6 EOOO E EOOO E E000 8 9 Sales 18.00 540 15.75 693 22.05 591 10 11 Variable costs: 12 Direct materials 3.60 108 3.60 158 3.60 97 13 Direct labour 2.60 78 2.60 114 2.60 70 14 Variable overhead 1.87 56 1:87 82 2.02 54 15 Total variable cost 8.07 242 8.07 355 8.22 16 220 17 Contribution 9.93 298 7.68 338 13.83 18 371 19 Fixed costs: 20 Production overhead 80 21 80 Administration overhead 80 44 44 22 Selling overhead 44 30 23 Total fixed costs 30 40 24 154 154 164 25 Profit 144 26 184 207 27 28 29 Percentages 30 100% 31 32 33 34 +Marginal costing statements 1 C/S ratio = contribution % sales 63% 2 If, contribution = fixed costs + profit c = fc + p Then, FC = Contribution - profit fc = c - p Fixed costs Contribution profit 164 = 63% 35% 164 = 28% 3 Therefore, as sales = 100% DO NOTAWNTOO Sales = 100% 164 % 28% 591 29 30 31