Marginal costing /OAR

Rune Registered Posts: 91 Regular contributor ⭐
I am so confused.......Help!!!

I really dont understand any of it..:crying:

Any advice on how I can get my head around it.......Please!!!!!!


  • visha
    visha Registered Posts: 218 Dedicated contributor 🦉
    Let us assume that you are organising to take a small party of 35 people to "ALTON TOWERS" for a day trip to have a good time. You also want to make a profit of £200 to donate towards your College Out door pursuits fund.

    what do you need?

    1 Hire a bus (50 passengers) costing £500 - FIXED COSTS
    2 Snacks goodie bag consisting of an apple, packet of crisps, a tin of coke, a sandwich and a two finger kit-kat. Cost of the bag -£2.50 -for each bag - VARIBLE COST.

    How much should we charge each of our passengers?

    Total costs equals (500 +(35x2.50)+200) = 787.50

    divide 787.50 by 35 = £22.50 each

    We have just worked out the Absorption rate of £22.50 per ticket towards the total cost of the trip.

    We start selling the tickets now and we find that we have only managed to sell 33 tickets giving a total income of (33 x 22.50) = £742,50 a shortfall of £45.00 (UNDERABSORPTION). This shortfall will have to be made by you and therefore there is a loss of £45 to be made up by you.

    That evening your brother asks you that can his 3 friends come and join the party? generating a sales of (22.5 x 3)= 67.50

    Total sales now equals (33+3=36 x 22.50) = £810 less our total total cost of (787.50+2.50=790) a net profit of £20 (we have to pay for an additional goodie bag of £2.50) £20 is OVERABSORTION.

    We have now recovered all our TOTAL COSTS and have a profit of £65

    Two days before departing for ALTON TOWERS your cousin finds out about the trip and wand 10 tickets from you but can only afford to pay £150. In other words £15 per ticket!

    Would you sell him 10 tickets at £15 each when you have costed that each ticket costs £22.50?

    Once qualified as an AAT technician, your answer will be a definite YES you will NOT be making a loss of £7.50 BUT an additional profit of £12.50 each (15 - 2.50 = 12.50) equalling to £187.50

    Total additional profit = (65 + 187.50) = £252.50

    REMEMBER your additional cost will only the VARIABLE cost of 2.50 each for the Goodie bag.

    Therefore your marginal costs is only £2.50 ( total of all Variable Costs)

    TOTAL SALES ( 36x22.50)+(10x15) = £960.00
    less Variable costs (46x2.50) = £115.00
    giving a contribution towards FC and Profit of £845.00
    less fixed cost of the bus £500 leaving a profit of £345
    less a FIXED contribution to College of £200 leaving a profit of £145.

    THAT is £20 overabsorbed and £ 125 (12.5 x10) from marginal sales = £145.:thumbup1:
  • CathG
    CathG Registered Posts: 145 Dedicated contributor 🦉

    That's an brilliant explanation, I'm going to print it out!:thumbup:
  • Rune
    Rune Registered Posts: 91 Regular contributor ⭐
    Thank you. I have my ECR skills test tomorrow an I am dreading it. This will help alot. Thank you.:001_smile:
    MOHMEDSALIM PATEL Registered Posts: 184 Dedicated contributor 🦉

    I believe that is the really good example you have delivered.
  • Rune
    Rune Registered Posts: 91 Regular contributor ⭐
    Thanks again I passed the skills test.
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