Use of marginal costing in decision making situations: make or buy, acceptance of additional work, price setting, optimum use of scarce resources, closing of potentially loss-making line or production department, target profit
Managers use marginal costing to make key business decisions. They focus on contribution — the amount each unit of sales adds toward covering fixed costs and generating profit.
Formula
Target profit output = (Fixed costs + Target profit) ÷ Contribution per unit
Real World
Nissan's Sunderland plant used marginal costing to decide whether to manufacture a car part in-house or buy it from a German supplier — choosing whichever option gave the higher contribution per unit.
Exam Focus
Always ignore fixed costs in short-run decisions unless the question states they change — focus on contribution.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
How well did you know this?