Villiers Engineering Ltd manufactures motorcycles. The company uses absorption costing and has been experiencing falling demand for its products due to a downturn in the economy. Mr Haq, the production manager, is worried because the total cost per unit is increasing, despite strict cost controls. Ms Inman, the marketing manager, is complaining that selling prices will have to be reduced to maintain sales levels. At a recent meeting they found that the selling price suggested by Ms Inman is lower than the total cost per unit calculated by Mr Hag and they concluded that lowering the selling price to increase sales will only lead to even larger losses.

Required Write a report addressed to Mr Haq and Ms Inman explaining:

(a) Why the total cost per unit increases as production decreases.

(b) Why marginal costing may be more appropriate than absorption costing for decision making in times of recession.