Imagine Rajesh & Co. Pvt. Ltd. gets a surprise order from a foreign buyer at a price lower than their usual selling price. Should they accept it? This is exactly what short-term decision making is about — and the golden rule is: ignore fixed costs, focus on contribution.
In short-term decisions, fixed costs are already committed — rent, salaries, depreciation — they don't change whether you accept that order or not. What does change is the contribution each unit brings in. Contribution = Selling Price − Variable Cost. As long as a decision gives you positive contribution, it adds to profit (or reduces loss). This is the core logic of marginal costing applied to decisions.
There are four classic short-term decisions the ICAI loves to test: (1) Accept or Reject a Special Order — accept if selling price > variable cost AND spare capacity exists. (2) Make or Buy — make if variable cost of making < purchase price (compare contributions, not total costs). (3) Product Mix with a Limiting Factor — when a resource like machine hours or raw material is scarce, rank products by contribution per unit of limiting factor (not just contribution per unit). (4) Shut Down or Continue — shut down only if the loss from continuing exceeds the avoidable fixed costs saved. These four scenarios cover 80% of exam questions in this chapter. This topic is asked every exam — typically as a 10-mark problem or a 5-mark decision scenario. The examiner always hides fixed costs to trick you into including them. Don't fall for it. Your mantra: short-term = contribution is king, fixed costs are passengers.