Marginal Analysis Flashcards
Uncontrollable Costs
Authorized at a different level of management
Not relevant to decision making unit
If there is excess capacity to produce, when should a special order be accepted?
When the selling price is greater than the variable cost per unit
If there is NO excess capacity to produce, how should a decision to produce or not be made?
The opportunity cost of using capacity should be considered in the decision. The opportunity cost is the contribution margin that would have been produced if the special order were not accepted.
Are shipping and handling costs included in variable costs?
Yes, if explicitly related to the order
What is the selling price per unit that should be charged for a special order with no excess capacity?
(Contribution margin given up + Variable cost) / Units ordered
When should a company sell or process further?
When the incremental revenue is greater than the split off costs.
What is incremental revenue?
Potential selling price - basic revenue before further development costs
