... Kelly. It affects cost measurement and explores the possible existence of idle capacity. Currently, Anagene's assignment of overhead costs is based on budgeted volume. However, by using practical capacity as the denominator volume, Anagene reduces allocated fixed overhead costs per unit and increases gross margin. Anagene's stable2 level of operations, based on practical capacity, reveals the company's true operating potential. However, using budgeted volume allows managers to hide idle capacity, since it is based on demand rather than production capacity. Overhead cost assignment is important because it affects gross margin and shows idle capacity. Disadvantages of Using Contribution Margin The primary problem with contribution margin is that it ignores fixed costs. We cannot ignore fixed costs since they affect the company's overall profitability. Fixed costs must be covered in an emerging market for Anagene to continue production. In the long run, ignoring fixed costs negatively affects the company's pricing strategy3. Therefore, because ...

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