Absorption costing and marginality

Although the total costs must be recovered by the product sales there may be possibilities to make additional sales at a price which is less than the full product cost. Such sales can be justified for strategic reasons such as to deter a competitor from building additional capacity or to develop a foothold in a new market. In order to avoid making such sales at a disastrously low price the concept of marginality and marginal cost must be developed. 

Total cost at production rate X tonnes/year = 3 0 million fixed 

however, we want to push the operation of the plant above normal capacity, to produce 52000 tonnes this year instead of 50000 tonnes, the average cost/tonne increases slightly but the marginal cost of the extra output increases dramatically since to achieve it all the plant output will have been 

Production (excludes profit) cost (VC) Total VC Total cost cost cost 

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The exercises described below will help the organic farmer to decide whether an enterprise should be started, expanded, modified, or even discontinued. There are different methods of costing absorption or full costing, and marginal or variable costing. These have different uses which are discussed below. 

Absorption, rate-of-return, and marginal pricing have been considered here on the basis of manufacturing cost. Total cost, which is the sum of manufacturing and general costs, can also be considered as the basis. In this case the appropriate profit to consider is the net annual profit rather than the gross annual profit. 

Figure 8.2 illustrates the format of a typical absorption costing exercise. This exercise can easily be used to calculate the overall profit or loss of each enterprise and its profit margin. See for example Fig. 8.3. One of the difficulties of this exercise is allocating the fixed costs between the various enterprises. Take housing for example if the shed is shared between beef cattle and sheep, then the allocation of the cost could be made on a space and time basis. On a large-scale farm with several workers there will probably be a shepherd, a stockman, and a tractor driver for the arable crops. However, on a smaller farm where the farmer and his family do all the work then division of time between...

The evaluation of carriers and catalyst compositions showed that significantly higher SO2 oxidation activity could be achieved with Cs as a promoter under the operating conditions downstream the intermediate absorption tower as demonstrated by the results in Table 1, where the activity compared to the standard product is increased by more than a factor 2. This was clearly sufficient for the introduction of VK69 to the market as a new sulphuric acid catalyst. The activity results for different melt compositions were used to optimise the vanadium content and the molar ratios of K/V, Na/V. and Cs/V. However, the choice of Cs/V was not only a question of maximum activity, because of the significant influence of the Cs content on the raw material costs (the price of caesium is 50-100 times the price of potassium on a molar basis). Here, the economic benefits obtained by the sulphuric acid producer by the marginal activity improvement at high Cs content also had to be taken into account. 

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