The principles of marginal costing are as follows.
- For any given period of time, fixed costs will be the same, for any volume of sales and production (provided that the level of activity is within the ‘relevant range’). Therefore, by selling an extra item of product or service the following will happen.
- Revenue will increase by the sales value of the item sold.
- Costs will increase by the variable cost per unit.
- Profit will increase by the amount of contribution earned from the extra item.