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Marginal costing is a technique that distinguishes between variable costs and fixed costs. In this approach to costing, only the variable costs of production are charged to cost units. Marginal costing and the concept of contribution are fundamental to the breakeven analysis or 'cost-volume-profit' (CVP) technique.
Required:
Problem (a) Explain the concept of contribution and its importance to the CVP technique.
Problem (b) Describe the nature of each of the 'dropping a product or service' and 'special contract' decisions for which the CVP technique can be useful.
Problem (c) Critically evaluate the CVP technique and explain the limitations of its use in the context of both the different interpretations offered by the economist's model of CVP and other limitations.
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