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# Prepare statements to show the profit earned in each of Years 2 and 3 using: (i) Marginal Costing; (ii) Absorption Costing

7. Emily Enterprises manufactures a single product ‘Little Darling’. The following
data apply to Years 1, 2 and 3.
Little Darling
(per Unit)
Selling Price £45
Costs:
Direct Materials £10
Direct Labour £10
Variable Costs £5
Fixed costs are £4 per unit at the normal production level of 8,000 per annum.
Units
Closing Stock
Year 1 800
Sales
Year 2 7,000
Year 3 9,000
Production
Year 2 6,400
Year 3 9,400
Actual Annual Fixed Costs
Year 2 £33,000
Year 3 £31,000
(a) Prepare statements to show the profit earned in each of Years 2 and 3 using:
(i) Marginal Costing;
(ii) Absorption Costing.
You should indicate the over or under-absorption of Fixed Costs where
necessary.

In Year 4 Emily wishes to increase her sales to 10,000 units and earn a minimum of
£160,000 profit (using marginal costing).
She plans to:
• reduce her selling price to £40;
• reduce stocks to 400 units;
• employ efficiency measures to reduce the marginal cost per unit of
production.
Fixed costs in Year 4 are expected to be £40,000.
(b) (i) Assuming Emily proceeds with the above plan, calculate, using marginal
costing, the profit she can expect to make in Year 4 before employing
efficiency measures to reduce marginal costs.
(ii) Calculate the saving per unit in marginal costs which would be required
to achieve Emily’s target profit of £160,000 in Year 4.