Marginal Costing

Marginal costing is a technique of analyzing the changes of cost due to the changes in volume of
production. The total cost of production may be classified into fixed and variable cost. The fixed cost
remains constant up to certain level of production. The variable cost changes due to the changes in
volume production. The variable cost is otherwise called as marginal cost.
Hence, marginal costing analyses the relationship of the changes of variable cost due to change in volume
of production.

Meaning of marginal costing

In economics, marginal cost is the cost of last unit. It is the added cost of an extra unit of output. It
denotes the amount by which aggregate costs are changed if the volume of output is increased by one
unit.
In cost accounting, marginal costing has a slightly modified meaning, here, it is a more descriptive term.
It is the technique of assigning only out of pocket costs to products.
Out Of Pocket costs are direct, avoidable or variable costs. These are the costs which are exclusively
incurred if specific products are manufactured and sold.
As such the technique is also known as ‘Direct Costing’ and ‘Variable Costing’. The Chartered Institute
of Management Accountants, London defines the term Marginal costing as “The ascertainment of
marginal cost by differentiating between fixed and variable costs and of the effect on profit of changes in
volume or type of output.”
Characteristics of Marginal costing
1. The total cost of production is classified into fixed and variable cost. Hence, all the functional
cost like production, administration and selling cost are grouped into fixed cost and variable cost.
2. It is a technique of costing which helps the management to take various managerial decisions.
3. The stock of finished goods and work in progress are valued at marginal cost.
4. The price of the product is determined on the basis of contribution
5. The variable cost is considered as the important cost of the product.
Assumptions of Marginal costing
1. The functional element of cost like, production, administration and selling and distribution cost
should be classified into fixed and variable cost.
2. Variable cost per unit should remain constant. It varies according to the change in volume of
production.
3. Fixed cost remains constant for all levels of production. Hence fixed cost per unit varies.
4. The selling price per unit should remain constant at all levels of activity.
5. The volume of production should be the only factor of production which influences the cost.
Advantage of marginal costing
1. Simple to operate and easy to understand
2. Helps the management to take various managerial decisions
3. It facilitates to fix the prices
4. This technique can be applied for profit planning
5. Facilitates for taking decision regarding the acceptance or rejection of bulk order, Optimum
product mix, etc.

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Prof. Milind Joshi Page 1
 Limitation of marginal costing
1. A change in the selling price affects the results of marginal costing.
2. The assumption that the fixed cost remains constant may not be always correct, since it may
also vary due to various reasons.
3. The assumption that the variable cost per unit remains constant is practically not possible
always. Increase in volume of production may reduce the variable cost per unit.
4. Marginal costing technique considers only the value of contribution for deciding the
profitability of a product. It ignores the time factor. Product which gives maximum
contribution is the best product compared to other, irrespective of the duration of production,

Absorption costing:
Absorption costing also known as full costing, is a costing technique in which all manufacturing costs,
variable and fixed are considered as accost of production and are used in determining the cost of goods
manufactured.
Point of Absorption costing Marginal costing
differentiation
1) Meaning Before we allocate all manufacturing However, only variable costs are
costs to products regardless of whether relevant to decision-making. This is
they are fixed or variable. This approach known as marginal costing/variable
is known as absorption costing/full costing
costing

2) Consideration It is costing system which treats all
manufacturing costs including both the
fixed and variable costs as product costs
It is a costing system which treats
only the variable manufacturing
costs as product costs. The fixed
manufacturing overheads are
regarded as period cost

3) Purpose – Compliance with the generally – More relevance to decision-

accepted accounting principles making
– Absorption costing is better in – Marginal costing can avoid
avoiding the fluctuation of profit profit manipulation by adjusting
being reported in marginal costing the stock level

4) Treatment for Fixed manufacturing overheads are Fixed manufacturing overhead is

fixed treated as product costing. It is believed treated as period costs. It is believed
manufacturing that products cannot be produced that only the variable costs are
overheads without the resources provided by fixed relevant to decision-making.
manufacturing overheads Fixed manufacturing overheads will
be incurred regardless there is
production or not

5) Value of closing High value of closing stock will be Lower value of closing stock that
stock obtained as some factory overheads are included the variable cost only

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Prof. Milind Joshi Page 2
 included as product costs and carried
forward as closing stock

Income statement Marginal Costing

A) Sales -----------
Less: Variable Production Costs: *****
Direct material costs *****
Direct Labour cost *****
Direct Expenses *****
Less: Variable overheads *****
Factory *****
Administration *****
Selling and Distribution *****
Cost of goods manufactured *****
Add: Beginning inventory *****
Cost of goods available for sale *****
Less: Closing Inventory *****
B) Cost of goods sold -----------
Marginal Contribution (A-B) ------------
Less: Fixed cost
Factory *****
Administrative *****
Selling and Distribution *****
Net Income -----------

Contribution:
The concept of contribution is vital in marginal costing. Contribution, is also called contribution margin,
marginal income and profit pick up, is defined as the difference between sales value and marginal or
Variable costs of sales. Contribution is not the same thing as net profit. It contributes towards the
recovery of fixed costs and profit.

i) Profit = C > F
ii) Losses = C < F
iii) Neither profit nor loss C = F
Equation:
a. Contribution= Selling Price – Variable Cost
C = SP – VC
b. Contribution= Fixed Cost + Profit
C = FC + Profit
c. Contribution – Fixed Cost = Profit / Loss
d. Selling Price – Variable Cost = Fixed Cost + Profit
e. Contribution= sales* P/V Ratio

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Prof. Milind Joshi Page 3
Profit/Volume Ratio:
When the contribution from sales is expressed as a sales value percentage, then it is known as
profit/volume ratio (or P/V ratio). The relationship between the contribution & sales is expressed by it.
Sound ‘financial health’ of a company’s product is indicated by better P/V ratio. The change in profit due
×to change in volume is reflected by this ratio. If expressed on equal footing with sales, it will show how
large the contribution will appear. If size of sales is $ 100, then P/V ratio of 60% will mean that
contribution is $ 60.
         One important characteristic of P/V ratio is that at all levels of output it will remain constant
because at various levels, variable cost as a proportion of sales remains constant.
Equation:
a) P/V ratio= Total Contribution × 100
Total Sales
b) P/V ratio = Sales – Variable cost
               Sales
c) P/V ratio  = 1- Variable cost
                   Sales
d) P/V ratio = Fixed Cost + Profit
                                Sales
         Also, by comparing the change in contribution to change in sales or by change in profit to change in
sales, it is possible to compute the ratio. Because it is assumed that the fixed cost will remain the same at
different levels of output, an increase in contribution will mean increase in profit.
Thereby, P/V ratio =Change in contribution ×100
                                    Change in sales
                        Or, Change in profit × 100
                              Change in Sales
Cost-Volume-Profit Analysis (CVP Analysis):
CVP analysis is based on an explicit model of the relationship between the three factors – costs, revenues
and profits and how they change in a predictable way as the volume of activity changes.
-Blocher, Chen and Lin, in cost management - A strategic Emphasis.
The name suggests the definition. The CVP analysis establishes the relationship between costs, volume
and profits. With a given change in cost and/or volume, what is expected change in profits? where in
volume is a function of (dependent on) price, cost is a function of volume.

– Break Even Point

The break Even analysis (BEA) indicates at what level total costs and total revenue are in equilibrium. It
is an analytical technique that is used to identify the level of output and sales volume at which the firm
‘breaks-even’ i.e. the revenues are sufficient to cover all costs.
BEA establishes the relationship among fixed and variable costs of production, value of output, sales
value and profit. It is hence, also known as Cost Volume Project (CVP) analysis.
Three approaches are commonly used to solve the BE problems. They are; the graphical method, the
equation method and the contribution margin method. We are going to discuss them in this chapter.
– The Graphical Method or Break Even Chart
When the BEA is represented graphically, it is shown as the break even chart. The BEC shows the
relationship of production costs and revenue to the volume of output. This relationship is determined by
a BEP on a graph. The BEP is a specific level of output or volume of sales where total revenue and total
costs of a firm are equal. It is the point of zero profit. This point is also known as no-profit, no loss or
profit beginning point.

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Prof. Milind Joshi Page 4
The graph represents a break even chart where the level of output is measured along the horizontal axis
and revenue and costs on the vertical axis. The total revenue curve TR is drawn as a straight line,
assuming that every level of output is sold at the same price. The fixed cost curve FC is drawn parallel to
the horizontal axis. The variable costs are assumed as constant so that the total cost curve TC is also
linear.
The point of equality B of TR and TC curves is the break even point. B is the point of no-profit no-loss at
OQ level of output. When the firm expands its output beyond OQ, it starts making profit.
Thus the area to the right of point B is the profit zone. When the firm’s output falls below the OQ level,
it incurs loss. So the area to the left of point B is the loss zone.

                                   
Equation:
Break even point is the level of sales at which profit is zero. According to this definition, at break even
point sales are equal to fixed cost plus variable cost.
[Break even sales = fixed cost + variable cost]

Break – even point (in units of output) = Fixed Costs

Contribution per unit
Break – even point (in revenue) = Fixed Costs × selling price per unit
Contribution per unit
Or
= Fixed Costs × Total Sales
Total Contribution
Or
= Fixed Costs
P/V Ratio

– Margin of Safety
           An excess of a company's actual sales revenue over the breakeven sales revenue, expressed
usually as a percentage.

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Prof. Milind Joshi Page 5
It is expressed as MoS = Actual sales revenue – BE sales. Nevertheless, firms compute the MS in terms of
ratio are: MoS Ratio =          MS             or = Profit
                                  Actual Sales      P/V Ratio
            The MS is an indicator of the strength of a firm. If the margin is large, it represents that the firm
can make profit even it has to face difficulties. On the other hand, if the margin is small, a small
reduction in sales can lead to loss. MS is nil at the point BE point for the reason that actual sales volume
is equal to the cost.

– Target Profit
At break even point, the profit is Zero. In case of the volume of output or sales is required to be
computed for a target (desired profit), this amount need to be added to fixed costs in the numerator
Target Volume (in units) = Fixed cost + Desired Profit
Contribution per unit
Target Volume (in revenue) = Fixed cost + Desired Profit * selling price per unit
Contribution per unit

-------------------------------------------------------------***---------------------------------------------------
Practice problems
Illustration 01: Data Pg no 630 jawaharlal/ Seema Srivastava
Sales price per unit Rs 10.
Variable Costs ( direct material , direct labour, variable factory overhead) per unit Rs 6/-
Fixed factory overhead Rs 25000 per month.Fixed administrative expenses Rs 5000 P.M.
Selling and distribution expenses are Rs 1.00 per unit.
Actual production, sales and inventories in units are;
1st Month 2nd Month 3rd Month 4th Month
Units in beginning inventory - - 3000 1000
Units produced 17500 21000 19000 20000
Units sold 17500 18000 21000 16500
Units in closing inventory - 3000 1000 4500

Illustration 02: eg.16.5 Pg no 655 jawaharlal/ Seema Srivastava

The data given below relate to Modern Garments which produced and sold T- Shirts during 2004-05:
Opening stock of 500 T-shirts valued at Rs 80 per T-shirt.
Production 5000 T-shirts
Sales @ Rs 300 per T-shirts 4000 T-shirts
Direct Material cost Rs 2,00,000
Direct Labour Cost Rs 1,00,000
Factory overheads
Variable Rs 1,00,000
Fixed Rs 6,00,000
Fixed selling and distribution overhead Rs 50,000
Closing stock is valued at Rs 80 per T shirt. Prepare a Income statement under marginal costing
Illustration 03: eg: 16.6 Pg no 657 jawaharlal/ Seema Srivastava

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Prof. Milind Joshi Page 6
Your company has a production capacity of 12500 units and normal capacity utilization is 80%. Opening
inventory of finished goods on 1-1-1999 was 1000 units. During the year ending 31-12-1999, it produced
11000 units while it sold only 10000 units.
Standard variable cost per unit is Rs 6.50 and standard fixed factory cost per unit is Rs 1.50. Total fixed
selling and administrative overhead amounted to Rs 10000. The company sells its product at Rs 10 per
unit.
Prepare Income statement under Marginal costing method.

Illustration 04: eg: 16.10 Pg no 663 jawaharlal/ Seema Srivastava

Using the information given below, calculate the net income for the month of October, November and
December and the value of finished goods on hand at the end of period using marginal costing method.
October Novembe December
r
Production units 45000 36000 45000
Sales units 36000 42000 48000
Opening Stock - 9000 3000
Closing stock 9000 3000 -
Additional information:
Selling price per unit Rs 50
Variable cost of production per unit Rs 30
Fixed production cost per month Rs 3,90,000

Illustration 05: eg: 16.15 Pg no 668 jawaharlal/ Seema Srivastava

In a purely competitive market 10,000 units of a product can be manufactured and sold and certain
amount of profit is generated. It is estimated that 2,000 units of that product need to be manufactured
and sold in a monopoly market to earn the same profit.
Profit under both the market condition is targeted at Rs 2,00,000. The variable cost per unit is Rs 100
and the total fixed cost is Rs 37,000.
You are required to determine the selling prices under both monopoly and competitive condition.

Illustration 06: eg: 16.12 Pg no 666 jawaharlal/ Seema Srivastava

A company annually manufactures and sells 20000 units of a product, the selling price of which is Rs 50
and profit earned Rs 10 per unit.
The analysis of cost of 20000 units is;
Material Cost Rs 3,00,000
Labour Cost Rs 1,00,000
Overheads Rs 4,00,000
(50% Variable)
You are required to compute;
a) Break even sales in units and in rupees
b) Sales to earn a profit of Rs 3,00,000
c) Profit when 15000 units are sold.
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Prof. Milind Joshi Page 7
Illustration 07:Ill 20.3 Pg no. 972 Nigam and Jain
The projected output of a plant, when sold, earns Rs 70,000 in sales income to Mixers Ltd. The variable
costs for this production volume would be Rs 30,000. The Fixed costs are Rs 20,000/- Determine the
following;
1. The break- even point of the company
2. The profit or loss to the company on sales of Rs 49,000 and Rs 28,000
3. The amounts of sales that will be enable the company to earn a net profit of Rs 28000.

Illustration 08: e.g.: 4 Pg no 409 Dr M. Wilson/ Himalaya publication

Calculate a) P/V Ratio B) FC C) Sales volume to earn profit of Rs 60000.
Sales Rs 200000
Profit Rs 25000
Variable cost 80% of sales

Illustration 09: e.g.: 8.14 Pg no 412 Dr M. Wilson/ Himalaya publication

Calculate BEP in terms of sales value and in units. Also calculate no units to be sold to earn profit of Rs
75000.
Fixed Factory Cost Rs 80000
Fixed selling cost Rs 20000
Variable manufacturing cost P.U. Rs 18
Variable selling cost P.U. Rs 12
Selling price per unit Rs 50

Illustration 10: eg: 16.22 Pg no 673 jawaharlal/ Seema Srivastava

M/s Natraj stationers manufactures plastic files for office use. The break – up of its cost and sales is as
follows:
Variable Cost per file Rs 40
Fixed Cost Rs 60,000 per year
Production capacity 3,000 files per year
Selling Price Rs 100 per file
You are required to compute the following;
a) Break even point
b) Number of files to be sold to earn net profit of Rs 30,000
c) If the firm manufactures and sells 500 files more per year in addition to units produced in (b)
with an additional fixed cost of Rs 2000, what should be the selling price to earn the same
amount of profit per file as in (b) above?
Illustration 11: eg: 16.24 Pg no 675 jawaharlal/ Seema Srivastava
Zed Ltd. produces two products P and Q/ The budgeted selling price per unit for P and Q are Rs 3600
and Rs 4320 respectively. Variable costs of production and sales for P and Q are 1800 and 3600

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Prof. Milind Joshi Page 8
respectively. Annual fixed costs of the company amounts to Rs 1,76,000. The company has two different
production/ sales option as under;
Option 1: A mix of 2 units of P for every 3 units of Q
Option 2: A mix of 1 unit of P for every 2 units of Q
Find out the combined break even point under each option and the optimal mix that the company
should adopt.

Illustration 12: eg: 20.24 Pg no 998 Lal Nigam/ Jain

Profit Volumr Ratio of a company is 50%, while its margin og safety is 40%. If sales volume of the
company is Rs 50 Lakhs, find out BEP and net Profit.

Illustration 13: eg: 20.22 Pg no 996 Lal Nigam/ Jain

A company earned a profit of Rs 30000 during the year 1994-95. If the marginal cost and selling price of
a product are Rs 8 and Rs 10 respectively, find out the amount of Margin of safety.

Illustration 14: eg: 16.25 Pg no 675 jawaharlal/ Seema Srivastava

A ltd. has been offered a choice to buy a machine between M1 and M2. The following dat are provided;
M1 M2
Annual output in units 10000 10000
Fixed cost Rs 60,000 Rs 32,000
Profit at above level Rs 60,000 Rs 48,000
The market price of the product is expected to be Rs 20 per unit. You are required to compute;
a) Break even point of each machine
b) The level of production units and sales at which both the machine earn equal profit
c) Which machine is preferable over other?

Illustration 15: eg: 16.26 Pg no 676 jawaharlal/ Seema Srivastava

A company has contribution /sales ratio of 0.4. It maintains a Margin of Safety of 20%. If its annual fixed
cost amount to Rs 24 lakhs, calculate;
a) BEP
b) Margin of Safety
c) Total Sales
d) Total Variable cost
e) Profit
Illustration 16: eg: 16.27 Pg no 677 jawaharlal/ Seema Srivastava
A company sells its product at Rs 15 per unit. In a period, if it produces and sells 8000 units, it incurs a
loss of Rs 5 per unit. If the volume is raised to 20,000 units, it earns a profit of Rs 4 per unit.
Calculate BEP in terms of rupees as well in units.

Illustration 17: eg: 20.23 Pg no 997 Lal Nigam/ Jain

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Prof. Milind Joshi Page 9
From the following information, calculate the BEP and units/ revenue required to earn a profit of Rs
36000.
Fixed cost Rs 180000
Selling Price per unit Rs 20
Variable cost per unit Rs 2

Illustration 18: (Export order decision) eg: 17.24 Pg no 766 jawaharlal/ Seema Srivastava
Following data are in respect of a firm manufacturing a single product for a particular period;
Sales (20000 units) Rs 2,00,000
Cost of Production (20000 units) Rs 1,20,000
Selling and distribution expenses Rs 30,000
Maximum Capacity 25000 units

Fixed costs included in cost of production are Rs 40,000 and only variable cost included in selling a
distribution expenses are commission @ 10% on sales and packing expenses @ 20 paise per unit.
1. An offer for purchase of 4000 units is received from outside India. No sales commission is
payable on such foreign order but packing costs will be 80 paise per unit.
What minimum price may be quoted for the foreign offer?
2. What should be the minimum price had the offer size been 8000 units instead of 4000 units?

Illustration 19: (Export order decision case study) eg: 17.16 Pg no 754 jawaharlal/ Seema Srivastava
Novina Industrial ltd. has received an export order for its only product that would require the use of half
of the factory’s present capacity of 4,00,000 units P.A.. The factory is currently operating at 60% level to
meet the demand of its domestic market.
As against current price of Rs 6.00 per unit, the export order offers @ Rs 4.50 per unit, which is less than
the cost of production, the details of which are given below;
Direct Material Rs 2.50 per unit
Direct Labour Rs 1.00 per unit
Direct Expenses Rs 0.50 per unit
Fixed overheads Rs 2,40,000
The condition of the export is that it has either to be accepted in full or totally rejected. The company is
considering following alternatives;
a) Accept the order and keep domestic sales unfulfilled to the excess demand for the same
b) Increase factory capacity by installing a few balancing machinery and equipment and also by
working extra time to meet the balance of required capacity. This will increase fixed overheads
by Rs 20,000 annually and the additional variable cost of overtime will work out to Rs 40000 P.A.
c) Outsource the production of additional requirements by supplying direct materials and paying
conversion charges of Rs 1.75 per unit to a small converter, and engaging one supervisor at a
cost of Rs 3,000 per month to look after quality, packing and dispatch, as addition into a fixed
cost.
d) Reject export order and continue with domestic market

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Prof. Milind Joshi Page 10
As a Management Accountant, you are required to make comparative analysis of various proposals and
suggest which of the alternative proposals is the most attractive to Novina Industries Ltd.

Illustration 20: (Accept/ Reject new order and sub contracting case study) eg: 2-I 14 Pg no 56 Ravi M
Kishore.
Pieco Engineering company has received an once off export order for its sole product that would require
the use of half of the factory’s total capacity, which is estimated at 4 lakh units per annum. The
condition of the export order is that it has to be accepted in full: acceptance of part quality is not
allowed.
The factory is currently operating at 60% level to meet the demand of its domestic customers. As against
the current price of Rs 6.00 per unit, the export offer is Rs 4.70 per unit, which is less than the total cost
of current production. The cost breakdown is given below;
Direct Material Rs 2.50 per unit
Direct Labour Rs 1.00 per unit
Direct Expenses Rs 0.50 per unit
Fixed overheads Rs 240000
The company has the following options;
i. Accept the export order and cut back domestic sales as necessary.
ii. Remove the capacity constraint by installing necessary balancing equipment and also by working
overtime to meet both domestic and export demand. This will increase fixed overheads by Rs
15000 annually, and additional cost for overtime work will amount to Rs 40,000 for the year.
iii. Appoint a sub contractor to manufacture additional requirement and meet the domestic and
export requirement in full by supplying raw material, paying a conversion charges at Rs 2 per
unit and appointing a super visor at a salary of Rs 3000 per month for checking the quality of the
product and controlling operations at the manufacturing unit.
iv. Refuse the order.
Illustration 21: (Shut down decision case study) eg: 2-I 15 Pg no 58 Ravi M Kishore.
Concept products Ltd. has three divisions each of which makes a different product. The budgeted data
for the next year are as follows;
Division A B C
Sales 112000 56000 84000
Costs Rs Rs Rs
Direct Material 14000 7000 14000
Direct wages 5600 7000 22400
Fixed overhead 28000 14000 28000
overheads 14000 7000 28000
Total Cost 61600 35000 92400
Profit/ (Loss) 50400 21000 (8400)
The manager is considering closing down division C. There is no possibility of reducing fixed costs. Advice
whether or / not Division C should be closed down?

Illustration 22: (Shut down decision case study) eg: 17.17 Pg no 756 jawaharlal/ Seema Srivastava

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Prof. Milind Joshi Page 11
The company is presently passing through a period of very lean market demand and operating at 50%
capacity and have also selling its product at a discounted price generating a sales revenue of 60,000 at
that level.
It is expected that the market scenario will improve in the next year and, on a conservative rate, the
company is likely to operate at 70% capacity level with increased sales volume of Rs 1,20,000.
The annual flexible budget of TBA Ltd. is as follows;
Production capacity 40% 60% 70% 100%
Rs Rs Rs Rs
Direct Material 16000 3000 28000 40000
0
Direct wages 20000 2400 35000 50000
0
Fixed overhead 19000 1900 19000 19000
0
Production overheads 2400 3600 4200 6000
Administrative overheads 800 1200 1400 2000
Selling and Distribution overheads 1200 1800 2100 3000
59400 7960 89700 120000
0
AS an option, the management is considering to close down the operation for one year and start
operation after one year when the market condition are likely to improve. If closed down for one year it
is estimated that;
i. The present fixed cost will reduce by 60%
ii. There will be a cost of Rs 10,000 towards closing down operations
iii. To maintain a skeleton maintenance services for which Rs 24,000 to be incurred
iv. An initial cost of re opening of Rs 20,000 to be incurred.
The other option is to keep the factory operational from one year and wait for better time next year.
You are required to work out the profitability under the two options and give our comment.

Illustration 23: (Diversification of product line case study) eg: 2-I 13 Pg no 54 Ravi M Kishore.
A company manufactures a single product in its factory utilizing 60% of its capacity. The selling price and
cost details are given below;
Sales (60000 units) Rs 5,40,000
Direct Material Rs 96,000
Direct Labour Rs 1,20,000
Direct Expenses Rs 18,000
Fixed Overheads
Factory Rs 2,00,000
Administration Rs 21,000
Selling & Distribution Rs 25,000
An analysis of fixed overheads reveals that 12.5% of factory overheads and 20% of selling & distribution
overheads are variable with production and dales. Administrative overheads are wholly fixed.

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Prof. Milind Joshi Page 12
It is expected that 2,000 units of the new products can be sold at a price of Rs 60 per unit. The fixed
factory overheads are expected to increase by 10%, while fixed selling and distribution expenses will go
up by Rs 12,500 annually. Administration Overheads remain unchanged. However there will be an
increase of working capital to the extent of Rs 75,000 which would take the total project cost to Rs 8.75
lakhs

Cost Element Rs. Per unit

Direct Material Rs 16.00
Direct Labour Rs 15.00
Direct Expenses Rs 1.50
Variable Factory Overheads Rs 2.00
Variable Selling & Distribution Overheads Rs 1.50
Since existing product could not achieve budgeted level for two consecutive years, the company decides
to introduce a new product with marginal investment but largely using present plant and machinery.
The cost estimates of the new product are as follows:
The company considers that 20% pre tax and interest return on investment is the minimum acceptable
to justify any new investment.
Required:
i. Should the new product to be introduced?
ii. Given the data above and making any assumption that you consider appropriate, are there any
further observation or recommendation you wish to make?

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