CMA Intermediate · Cost Accounting · Marginal Costing
A firm has spare capacity and is evaluating a special order priced below its normal selling price but above variable cost. According to marginal costing principles, which approach should guide acceptance, assuming no effect on regular sales and no extra fixed cost?
The order should be accepted if its price exceeds the variable cost per unit. Under marginal costing, fixed costs do not change with the order, so any positive contribution increases profit when spare capacity exists and regular sales are unaffected.
- AAccept if price exceeds variable cost per unitCorrect
- BAccept only if price covers full absorbed cost per unit
- CAccept only if price equals the normal selling price
- DAccept only if price covers variable cost plus the average fixed cost
Explanation
Fixed costs are sunk with respect to the order, so only incremental (variable) cost is relevant. Any price above variable cost gives positive contribution and raises profit. Full-cost based options ignore this and would reject profitable orders.
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