Marginal Costing and Decision Making - Lecture 8b

Question 1

What is marginal activity

Answer 1

Relatively small increase reduction in the scale of operations

Question 2

When can we ignore fixed costs?

Answer 2

• special order problems
• make or buy problems
• branch closure/ product discontinuation

Question 3

Special order problem

Answer 3

Rule:
* Ignore fixed costs.
* Calculate the contribution made of the order is accepted
If positive → accept
If negative → reject

Question 4

Make or buy problems

Answer 4

Rule:
If making involved forgoing production of another product then
opportunity cost needs to be taken into account.

Question 5

Product discontinuation

Answer 5

Rule: use the contribution of the product (rather than the profit after fixed
costs have been deducted).

Question 6

Branch closure

Answer 6

Branch Closure
This works on the same principle as Product discontinuation
Rule: use the contribution of the branch (rather than the profit after fixed
costs have been deducted).