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!!!!!!
I really dont understand any of it..:crying:
Any advice on how I can get my head around it.......Please!!!!!!
0
Comments

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 kitkat. 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)
MARGINAL COSTING
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.:thumbup1:0 
Oar
That's an brilliant explanation, I'm going to print it out!:thumbup:0 
Thank you. I have my ECR skills test tomorrow an I am dreading it. This will help alot. Thank you.:001_smile:0

Excellant
I believe that is the really good example you have delivered.0 
Thanks again I passed the skills test.0
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