Question

Fleet Street Inc., a manufacturer of high-fashion clothing for women, is located in South London in the UK. Its product line consists of trousers (28%), skirts (34%), dresses (15%), and other (23%). Fleet Street Inc. has been using a volume-based rate to assign overhead to each product; the rate it uses is £2.50 per unit produced. The results for the trousers line, using the volume-based approach, are as follows:

Number of units produced		10,000
Price (all figures in £)		29.75
Total revenue		297,500
Direct materials		48,900
Direct labor		163,000
Overhead (volume-based)		25,000
Total product cost		236,900
Nonmanufacturing expenses		44,200
Total cost		281,100
Profit margin for trousers		16,400

Recently, it has conducted a further analysis of the trousers line of product, using ABC. In the study, eight activities were identified, and direct labor was assigned to the activities. The total conversion cost (labor and overhead) for the eight activities, after allocation to the trousers line, is as follows

Pattern cutting	£	32,650
Grading		28,200
Lay planning		27,500
Sewing		31,200
Finishing		21,200
Inspection		9,600
Boxing up		5,200
Storage		10,400

Required:

Determine the profit margin for trousers using ABC.

Answer 1

Calculation of Profit Margin :-

Particulars	Amount in GBP	Amount in GBP
Total Revenue (10000unit * 29.75) (A)		297500
Less : Total Product Cost :-
Direct Materials	48900
Pattern Cutting	32650
Grading	28200
Lay planning	27500
Sewing	31200
Finishing	21200
Inspection	9600
Boxing up	5200
Storage	10400
Total Product Cost		214850
Less : Non Manufacturing Expenses		44200
Total Cost (B) (214850+44200)		259050
Profit Margin (A - B)		38450