Cost and Profit Control

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MARGINAL/CONTRIBUTION COSTING

MARGINAL/CONTRIBUTION COSTING the cost of raising output by one single unit

MC = Variable costs (vary with output eg Utility bills)

Fixed costs are ignored (in the long run may change overtime but in the short run don't usually change eg wages)

Contributions are usually put towards paying fixed costs and after enough payments of the contribution has been made towards fixed costs it contributes to profit

A business must cover its fixed costs or will make a loss, however if prices were set at the marginal cost losses would be made as businesses would never be able to cover their fixed costs

MARGINAL COSTING IS USED TO:-

DECIDE WHAT PRICES TO CHARGE

EVALUATING SPECIAL ORDER DECISIONS

PRICING DECISIONS

Marginal costing helps to make pricing decisions eg considering charging a lower price to gain a foothold in a new market and compete

Fixed costs are ALWAYS ignored

If the strategy is successful and it takes off in the new market it may be possible to raise prices in the future to create bigger contributions towards profit

Although this may achieve a positive contribution this is dependent on the firm achieving sufficient sales, which isn't certain as it depends on the state of the market for example if a competitors prices are lower then sales would probably be low