129 Marginal cost per unit of component X Materials *2.75 Labour 21.75 Variable overheads 20.50 Total 25.00 (a) The purchase cost of the above component is 25.75 each. If the company is having spare capacity which can not be filled with more remunerative jobs, it is recommended that the above component be manufactured in the company since the marginal cost at 25.00 each is less than the purchase cost of 25.75 (b) In the event of purchase cost of 34.85 each being less than the marginal cost of 25.00 each, it is recommended that the component be bought from the supplier as this results in a saving of 20.15 each. The spare capacity thus available can be utilised for other purposes, as far as possible. 4. Closure of a Department or Discontinuance of a Product As discussed earlier, marginal costing technique heps in deciding the profitability of a product. It provides the information in a manner that tells us how much sach product contributes towards fixed cost and profit; the product or department that gives least contribution should be discarded except for a short period. If the management is to choose some product out of the given ones, then the products giving the highest contribution should be chosen and those giving the least should be discontinued. 5. Maintaining a Desired Level of Profit A company has to cut prices of its products from time to time because of competition, Government regulations and other compelling reasons. The contribution per unit on account of such cutting is reduced while the industry is interested in maintaining a minimum level of its profits. In case the demand for the company's product is elastic, the maximum level of profits can be maintained by pushing up the sales. The volume of such sales can be found out by marginal costing techniques. S. Ltd. manufactures and markets a single product. The following information is available: per unit Materials 8.00 Conversion costs (variable) 6.00 Dealer's margin 2.00 Selling price 20.00 Fixed cost