Lecture 8b marginal costing and decision making Flashcards
How to calculate marginal cost (MC)?
Marginal Cost = Extra Variable Costs only
How do you calculate MarginalRevenue(MR)?
Extra revenue from selling one additional unit
How do you calculate Contribution per Unit?
SellingPrice−VariableCostperUnit
How do you calculate TotalContribution?
ContributionperUnit × UnitsSold
How do you calculate Profit (using marginal costing)?
TotalContribution−TotalFixedCosts
How do you calculate OpportunityCost?
Lost Units × Contribution per Unit
How do you calculate Adjusted ‘Make’ Cost (with opportunity cost)?
Marginal Cost to Make + Opportunity Cost per Unit
When to use marginal costing?
Use when fixed costs do not change based on the decision – i.e., they’re irrelevant to the choice.
When should you ignore fixed costs in decision-making?
When they won’t change as a result of the decision (e.g. special orders, make or buy with spare capacity)
What is the Special Order Decision Rule?
Accept if contribution is positive (Selling Price > Variable Cost)
Reject if contribution is negative
Would you Make or Buy with Spare Capacity?
Make if variable cost < buy-in price
Make or Buy without Spare Capacity
Include opportunity cost of lost contribution from alternative use
What is the Product Discontinuation Rule?
Discontinue if product has negative contribution
What is the Branch Closure Rule?
Close branch if contribution is negative; fixed costs stay either way
What does contribution mean?
it is how much each sale helps pay off fixed costs and earn profit.
