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How do you calculate marginal profit in a question like this? as by using profit = inventory difference x OAR I cannot see how to apply it
The question gives you: absorption profit = x amount
finished goods = x amount
fixed production overhead rate = x amount
fixed production overheads = x amountHow do you calculate marginal profit? as I am thinking fixed production overhead rate is OAR but change in inventory how can you do? and absorption profit how does it come in calculations?
I cannot really understand what it is you are asking. It would be better if you were to quote from an actual question you have come across on this, and then it will be clear.
If you were asking about arriving at the absorption profit when the question tells you the marginal profit (or the other way round), then the difference between the two is always the change in the inventory over the period multiplied by the fixed production overheads per unit.
This is explained in detail in my free lectures on absorption and marginal costing.
The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Thank you for your reply.
Absorption profit is 47200. I need to find what profit would be if marginal was used.
Inventory is 4500
Increase in finished goods = 600
fixed production overhead = 7.50/unit
fixed production overhead absorbed = 3750I think by reading your reply I should do 4500 + 600 x 7.50? but how do you use the 3750 ?
Answers available are 55450, 51700, 42700, 38950
Assuming that you have copied the question correctly then the difference in the profits is the increase in inventory of 600 multiplied by the fixed overhead per unit of $7.50. So a difference of $4,500. Given that the inventory increased, the marginal profit must be lower by $4500.
The overheads absorbed is of no relevant.
Again, why do you not watch the free lectures?!!
Thankyou, now I say how easy it is. Already did watch some of your lecutres of other topics and I finding them very helpful.
Also to provide all of this material for free, wow, I am sure many people are thanking you, starting with me, as this qualification is super costly.
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