Use cost information for decisions
Apply total, average and marginal costs to pricing, performance and special-order decisions while identifying relevant costs.
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 5.4.3. Cambridge states that both current versions have no significant changes affecting teaching. This lesson maps only its named section; other sections and full paper practice remain separate. Written practice is self-checked
Before you begin
- No previous business course is assumed. Use the lesson's definitions before applying them to the business context.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What is average cost?
What you will learn
- Distinguish total, average and marginal cost
- Use cost data to inform pricing and performance
- Evaluate special-order decisions using relevant evidence
Write a recommendation from cost evidence
- Write your answer before opening the comparison. Use a calculation, explain its effect on this business and state what would change your recommendation.
- The annotations identify knowledge, application, analysis and evaluation. These can work together within a paragraph; they are not a required four-paragraph formula.
Original StudyForA practice for Business 9609 section 5.4.3. Self-check guidance, not an official mark scheme or grade. These responses have not yet been reviewed by a subject teacher. Other defensible responses are possible when supported by the stated evidence.
Develop a weak recommendation
Explain what the weak answer misses, then recommend whether Alder should accept the order at the offered price.
Alder textile workshop
[1] Alder is offered a one-off order for 500 bags at $8 each. All variable production and packing costs total $5 per bag. The order also requires a one-off setup cost of $400. Monthly rent of $2,400 is unchanged whether Alder accepts or rejects the order.
[2] There is spare capacity for only 300 bags before the deadline. Accepting the whole order would therefore replace 200 regular sales. Regular bags sell for $12 and also have variable costs of $5 each. Those regular sales cannot be postponed; outsourcing and extra production shifts are unavailable. Assume all sales are paid and there are no other incremental costs.
[3] Weak response: ‘Alder will make $1,500 profit because 500 × ($8 − $5) = $1,500. It should accept because more sales will help the business grow.’
Repair and evaluate Identify two omissions and one misleading term in the weak response. Write a developed recommendation using the capacity constraint and explain the price condition under which the financial decision would change.
One developed response
The $1,500 is contribution before setup and displaced sales, not total business profit. Contribution is revenue less variable costs: 500 × ($8 − $5) = $1,500. After the $400 setup, this order adds $1,100 before considering the use of scarce capacity. Unchanged rent is excluded from this incremental comparison because it occurs with either decision.
Only 300 bags fit into spare capacity. Making the other 200 means losing regular contribution of 200 × ($12 − $5) = $1,400. The net effect is therefore $1,100 − $1,400 = −$300 compared with rejecting the order. More units sold would leave Alder financially worse off under these assumptions.
I would reject the offer at $8. To avoid reducing the result, total special-order revenue must cover $2,500 variable cost, $400 setup and $1,400 contribution forgone: $4,300, or $8.60 per bag. At $8.60 Alder is financially indifferent; a price above $8.60 gives a positive incremental benefit if every other assumption stays the same.
Even above that threshold, displacing regular customers might damage repeat business. The case does not establish this effect, so Alder should check it before agreeing. A revised deadline that genuinely avoids displacement could change the calculation, but it is unavailable in the present offer. The decision depends on the actual capacity constraint, not a general rule that extra orders should always be rejected.
Why this response works
- Knowledge: contribution and total profit are distinguished. The setup cost and contribution forgone are the two missing deductions.
- Application: the response uses Alder's 300 spare places and 200 displaced regular sales, not just the company name.
- Analysis: the capacity constraint causes lost regular contribution; the comparison shows why higher sales can reduce the financial result by $300.
- Evaluation: the conclusion follows from the net effect and gives a precise $8.60 threshold. It distinguishes the stated facts from a possible customer relationship risk.
- Improve your draft: if it only lists advantages and disadvantages, add a sentence explaining which evidence matters most here and why. Do not subtract unchanged rent a second time.
Independent response: profit and cash timing
Use this new case to make your own judgement. Do not copy Alder's rejection: the spare capacity and payment terms are different.
Cedar ceramics studio
[1] Cedar is offered 400 cups at $14 each. Variable costs are $9 per cup and the order requires a $600 setup. There is verified spare capacity for 450 cups, so no regular sales would be lost. Existing fixed costs are unchanged. There are no other incremental costs in this case.
[2] The customer would pay 60 days after delivery. All variable costs and setup must be paid before delivery. Cedar has $2,000 cash available for this order after meeting its other commitments, with no other receipts or payments before the customer pays. No deposit or borrowing has yet been agreed.
Independent recommendation Evaluate whether Cedar should accept this order on the proposed terms. Calculate the incremental financial benefit and the funding gap, explain why both matter, and recommend a specific condition for accepting.
Reasoning to compare with your response
The order earns $5,600 revenue and incurs $3,600 variable cost plus $600 setup. Its incremental benefit is $1,400. There is no contribution forgone because 400 cups fit into 450 spare places. This supports accepting on financial grounds, assuming the customer pays and the stated costs are complete.
However, Cedar must pay $4,200 before receiving the revenue and has only $2,000 available. The funding gap is $2,200. A positive eventual benefit cannot pay today's bills, so Cedar cannot fulfil the order on the current terms using its available cash alone.
I would accept only after securing enough cash in time, for example an agreed deposit of at least $2,200 before costs fall due. The deposit is part of the $5,600 price, not extra revenue. Alternatively, Cedar could investigate affordable credit, accounting for its cost and repayment terms; no such facility is currently confirmed. It should also assess the customer's ability to pay. Without an agreed funding solution, it should decline or renegotiate despite the $1,400 potential benefit.
Why this response works
- Check your calculation: $5,600 − $3,600 − $600 = $1,400 incremental benefit. Explain why the verified spare capacity means no displaced contribution is deducted.
- Check your cash reasoning: $4,200 − $2,000 = $2,200 shortfall before customer payment. Do not treat the future $5,600 receipt as cash available now.
- Check your evaluation: reconcile the benefit with the funding constraint. Give an achievable condition and its timing instead of an unsupported ‘it depends’ conclusion.
- A different recommendation can be defensible if it uses the evidence and explains its assumptions. Do not assume that a deposit, credit facility or repeat order already exists. Any borrowing costs would reduce the $1,400 benefit.
Cost measures answer different questions
Total cost is the sum of costs for an output or period. Average cost = total cost ÷ number of units. Marginal cost is the additional cost of producing one more unit or a defined extra quantity, depending on the data provided.
Average cost helps compare unit costs but can conceal changes in mix or fixed-cost allocation. Marginal cost can inform an incremental decision, but the business must include all extra costs and consider capacity, opportunity cost and quality.
Apply costs to price and performance carefully
Cost information can support pricing by showing cost recovery needs, but customers and competitors influence what price is viable. Comparing actual costs over time can reveal waste or changes in efficiency; accurate volume and allocation data are essential.
For a special order, compare additional revenue with additional costs if spare capacity exists. If regular sales are displaced, include the contribution forgone. A short-run decision based on spare capacity should not become a long-run price that fails to cover fixed costs.
Pause and explain
Total cost is $18,000 for 900 units. What is average cost per unit?
Worked example
A factory's total cost is $48,000 for 2,000 units. A new order for 100 units requires $1,900 of extra materials and $400 of delivery. Calculate average cost and the order's additional cost per unit.
Show the worked solution
- Average cost = 48,000÷2,000.
- Order-specific cost = 1,900+400.
- Divide order-specific cost by 100 units.
Answer Average cost is $24 per existing unit. The extra order costs $2,300, or $23 per additional unit, before any other order-specific cost or opportunity cost.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A firm's total costs are $75,000 at 3,000 units. Calculate average cost. If total cost rises to $75,900 at 3,100 units, calculate the average additional cost across those 100 extra units.
Give me a hint
Calculate each ratio from the figures provided and distinguish average from the incremental change.
Compare my reasoning
- Initial average cost = 75,000÷3,000.
- Extra total cost = 75,900−75,000.
- Divide the extra cost by 100 additional units.
Initial average cost is $25 per unit. Extra cost is $900 for the additional 100 units, so average additional cost across that increment is $9 per unit. The two measures differ because fixed costs are spread across more output.
Look for these in your work
- Both calculations are correct
- The periods/output are compared consistently
- Average and incremental measures are distinguished
A business considers a special order that pays $16,000 and adds variable production costs of $11,500, delivery of $800 and a setup cost of $700. Calculate additional contribution before other opportunity costs.
Give me a hint
Subtract all order-specific additional costs from the special-order revenue.
Compare my reasoning
- List the incremental costs: 11,500+800+700.
- Total incremental cost is $13,000.
- Subtract from $16,000 and state what is excluded.
Additional contribution before other opportunity costs is $16,000−$13,000=$3,000. The business should still check capacity, displaced orders and any quality or customer effects.
Look for these in your work
- All stated incremental costs are included
- Contribution is correct
- Excluded decision factors are identified
A special order would use the only production slot available for a regular order that contributes $2,400. The special order has additional contribution of $3,000. Explain the relevant comparison.
Give me a hint
Include the contribution that would be lost by displacement.
Compare my reasoning
- The special order contributes $3,000 before displacement.
- Giving up the regular order sacrifices $2,400 contribution.
- Net incremental benefit is $600 before any further effects.
After the $2,400 contribution forgone, the special order adds $600 ($3,000−$2,400), before any other effects. The firm should also consider strategic customer relationships, capacity, timing and whether both orders can be rescheduled.
Look for these in your work
- Opportunity cost is included
- Net difference is correct
- Other relevant effects are acknowledged
Common mistakes
- Assuming average cost equals the cost of one extra unit
- Using total cost without identifying what changes with the decision
- Accepting an order below average cost without checking capacity and opportunity cost
What can you explain now?
What is average cost?
Compare with the explanation
Total cost divided by output
It gives a mean cost per unit for the stated output.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
When should a decision use average cost, marginal or incremental cost, and when must opportunity cost be included?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.