Marginal Costing is a useful technique used by the management of most of the manufacturing concerns for taking various and important managerial decisions.
Some of the important decision making areas where marginal costing technique is used are:
(i) Fixation of Selling Price:
(a) Under normal circumstances,
(b) For special market (export) or for a special customer,
(c) During recession,
(d) At marginal cost or below marginal cost.
(ii) Decision relating to the most Profitable Product Mix:
(a) Selection of Optimal Product Mix
(b) Substitution of one product for another
(c) Discontinuation or dropping of a product line
(iii) Decision relating to make or buy:
The management has to take decision as to whether it will be profitable to manufacture the product or parts or to buy them from outside.
(iv) Retaining or replacing a machine:
(v) Selling the product in the home or in the export market:
(vi) Expanding or contracting:
The management has to take decision whether to expand or contract the business under different economic conditions.
(vii) Shut down or continue:
In certain economic conditions, the management has to take crucial decision whether to shut down the factory or to continue or to determine the level of output especially in period of recession.
(viii) Decision making relating to Price-Mix.