ABSTRACT
Marginal cost pricing (the setting of prices by reference to the marginal costs of an activity) must be treated with caution. If all activities were priced on a marginal cost basis there would be a risk of generating insufficient revenues to finance the indirect costs of the organisation. Thus it should only be undertaken in the following circumstances:
the proposed activity is for a once-off contract fairly short-term in nature. Thus it is not applicable to ongoing activities;
pricing the activity at marginal cost will not affect the price charged for the mainstream provision of the same activity; this implies that an activity might be provided in some other geographic location;
the proposed activity is a fairly small proportion of the existing workload of the department.
