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Concept Atlas/SET B

SET B · Foundational

Marginal Cost & Contribution

Marginal cost = variable cost of one more unit. Contribution = Selling price − VC.

Formula / Rule

Contribution per unit = SP − VC; BEP units = Fixed / Contribution per unit

Memory aid

Fixed costs are sunk for next-unit decisions; only variable matters.

⚠ Most common mistake

Allocating fixed overhead into per-unit cost for short-run pricing decisions.

Go deeper

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Builds toward

Open after you nail this one.

  • Transfer Pricing — General Rule
    Minimum transfer price = variable cost + opportunity cost forgone.
  • Standard Costing — Variance Analysis
    Material/Labour variances split into Price (rate) × Quantity (efficiency × yield/mix).
  • Make or Buy Decision
    Compare relevant cost (avoidable fixed + variable) of making vs buy price + opportunity gain from freed capacity.
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