marginal analysis

• Using contribution and relevant costing thinking to make decisions that involve small variation in existing practice or limited time periods. Fixed costs are irrelevant as they dont vary with the decision outcome.
• May be used in four key areas: accepting/rejecting special contracts, determining the most efficient use of scarce resources, make-or-buy decisions (outsourcing), closing or continuation decisions.
• accepting/ rejecting special contracts- selling spare capacity off to cheaply, loss of customer goodwill, indication of lack of demand for full capacity, could use lower price to enter new markets
• Make or buy- loss of control of quality, potential unreliability of supply, expertise of specialists