An international airline has a catering division responsible for the provision of catering services on its aircraft.

The company, in preparing its budget for the next year, is examining very carefully the cost effectiveness of each of its divisions. The catering division, in which an absorption costing system is operated, is under particular scrutiny.

You are required, as recently-appointed management accountant, to prepare a report on the catering division for the managing director, which should include specific comments on:

(a) Problems that are apparent in operating an absorption costing system in this environment. (5 marks)

(b) The merits of introducing a marginal costing system.

(c) The factors to be considered in deciding whether or not the company should use the services of a catering specialist available on a contract basis.