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ACCA Applied Skills · Performance Management · Limiting factors

A company has a single limiting factor of skilled labour. Product M has contribution of $40 per unit and uses 5 hours. Product N has a selling price of $50, variable cost of $30 and uses 2 hours. Fixed costs are $10,000 whichever product is made. Which is the best use of labour?

N is best because it earns $10 contribution per skilled labour hour, compared with $8 for M. Under a single limiting factor products are ranked on contribution per scarce hour, and the unchanged fixed costs do not affect the decision.

  1. AM, because it has the higher contribution per unit
  2. BM, because fixed costs are lower per hour
  3. CN, because it earns $10 per labour hour against $8 for MCorrect
  4. DN, because it has the lower selling price

Explanation

N contribution = 50-30 = $20; per hour 20/2 = $10. M: 40/5 = $8. N ranks first. Fixed costs are the same either way and are irrelevant to the choice.

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