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9609 · 5.4.2

Approaches to costing: full, contribution — practice questions

Practice and worked examples for 9609 Approaches to costing: full, contribution. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A firm makes one product. Selling price $40, variable cost $22, fixed costs $36,000 per month, output 3,000 units.

(a) Calculate contribution per unit. (b) Calculate total contribution and profit for the month.

Show solution outline

(a) Contribution per unit = Selling Price - Variable Cost Contribution per unit = $40 − $22 = $18

(b) Total Contribution = Contribution per unit × Output Total Contribution = $18 × 3,000 = $54,000

Profit = Total Contribution - Fixed Costs Profit = $54,000 − $36,000 = $18,000

Worked example 2

Using the data from the previous example, a customer offers a one-off order for 500 units at $28 each. The firm has spare capacity. The full unit cost (including allocated fixed overheads of $36,000 / 3,000 = $12) is $22 + $12 = $34. Should the firm accept the order?

Show solution outline

Analysis using contribution costing (correct for a short-run, special order decision with spare capacity).

  1. Calculate contribution per unit on the special order: Offered Price - Variable Cost = $28 - $22 = $6
  2. Calculate total contribution from the order: Total Extra Contribution = $6 × 500 units = $3,000
  3. Decision: Since the fixed costs of $36,000 will be incurred regardless of this order, accepting it will increase the firm's total profit by $3,000. Therefore, the firm should accept the order.

Note: Rejecting the order because the price ($28) is less than the full cost ($34) would be an incorrect decision, as it ignores the fact that the order makes a positive contribution to covering fixed costs.

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