In marginal costing, fixed costs are assumed to remain the same within a relevant range. What is a real limitation of this assumption?

• A. Fixed costs may be step-fixed and increase outside the relevant range.
• B. Variable costs are irrelevant to marginal costing.
• C. Selling price per unit must always stay constant.
• D. All costs are purely variable in the long term.

Answer: (A)

In marginal costing, fixed costs are treated as constant for a given level of activity within a relevant range. This makes it easy to see how much each extra unit costs to produce and to assess contribution to cover fixed expenses. The real limitation is that fixed costs aren’t truly constant as output changes. They often move in steps: once you exceed a capacity level, you may need additional facilities, equipment, or additional supervisory staff, causing total fixed costs to jump. Outside the relevant range, the assumption breaks down, so marginal cost decisions and per-unit cost calculations can become misleading.

While the method uses variable costs to calculate the contribution, they are not irrelevant in marginal costing. Also, selling price can vary and isn’t the focus here, and fixed costs aren’t absent in the long run—some fixed elements persist (like rents and depreciation) even in the long term.