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Poor Decision Making and Fixed Percentage

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Poor decision making may result when acceptable prices are determined by adding a fixed percentage to the "full cost" of a product when that "full cost" includes a unitized fixed cost. The lesson in the module is that any selling price above the contribution margin will add to the wealth of the firm. This being the case, is there a danger in the decision rule that states "always accept any offer that has a positive contribution margin?" Please expand on your explanation by giving examples.

Also, what about the issue of capacity? Does it have any impact on the above decision making process if a company operates at full capacity or have idle capacity?

Why is it sometimes important to allocate overhead costs among products, services or some other grouping? Other times the allocations should be disregarded as in this case - why?

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Poor decision making may result when acceptable prices are determined by adding a fixed percentage to the "full cost" of a product when that "full cost" includes a unitized fixed cost. The lesson in the module is that any selling price above the contribution margin will add to the wealth of the firm. This being the case, is there a danger in the decision rule that states "always accept any offer that has a positive contribution margin?" Please expand on your explanation by giving examples.

There is a danger in the decision rule always accept any offer that has a positive contribution margin. The reason is that the contribution margin refers to the difference between sales less all variable expenses. Thus contribution margin that is positive may still be less than the overheads the ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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