Accounting · Marginal Costing
'Global Electronics' uses Marginal Costing for decision-making. The company has received a bulk export order at a price less than its Total Cost but more than its Variable Cost. The Fixed Costs are 4,000,000, and current capacity utilization is 70 percent. Which of the following statements about Marginal Costing is WRONG regarding its application to this decision, and what is the key factor that justifies accepting this order?
- 1Wrong Statement: Marginal Costing is ineffective when deciding on special orders, as it ignores fixed costs entirely.
- 2Wrong Statement: Marginal Costing correctly calculates the Absorption Costing Profit, which is required for external reporting.
- 3Wrong Statement: Marginal Costing assumes that Fixed Costs are relevant and change with the volume of production in the short run. Justification: The order can be accepted because the sale price exceeds the Marginal Cost, generating a positive contribut ion to cover fixed costs.✓
- 4Wrong Statement: Marginal Costing is unsuitable for pricing decisions when a firm operates below full capacity.
Correct answer
Wrong Statement: Marginal Costing assumes that Fixed Costs are relevant and change with the volume of production in the short run. Justification: The order can be accepted because the sale price exceeds the Marginal Cost, generating a positive contribut ion to cover fixed costs.
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