Marginal costing

Decision Making: Price Setting

Marginal costing gives the minimum acceptable selling price:

Minimum price = Variable cost per unit (so contribution is at least £0.01)

In practice, a mark-up above variable cost is needed to:

• Cover fixed costs
• Generate a profit

Minimum price must cover at least: Direct materials + Direct labour + Variable overheads

Example — Maureen Rogers doll:

• Materials £6.50 + Labour £5.00 + Packaging £2.20 + Variable overheads £4.80
• VC = £18.50 → minimum selling price = £18.51

Non-financial factors:

• Pricing strategy (skimming vs. penetration)
• Competitor prices in the market
• Brand reputation and perceived quality
• Customer price sensitivity (price elasticity)