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CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions

A company makes products P and Q using the same scarce machine hours. P has contribution ₹60 per unit and needs 4 machine hours. Q has contribution ₹45 per unit and needs 2 machine hours. Machine hours are the only limiting factor. Which decision is correct?

Q should be preferred. With machine hours limited, ranking is by contribution per machine hour: Q gives ₹22.5 (45/2) while P gives only ₹15 (60/4). The higher unit contribution of P is misleading because it uses twice the scarce hours.

  1. APrefer P because its contribution per unit is higher
  2. BPrefer Q because its contribution per machine hour is ₹22.5 against ₹15 for PCorrect
  3. CPrefer P because its contribution per machine hour is ₹15
  4. DBoth are equally profitable per machine hour

Explanation

Contribution per machine hour: P = 60/4 = ₹15; Q = 45/2 = ₹22.5. When a factor is limiting, products are ranked by contribution per unit of the limiting factor. Ranking by contribution per unit favours P wrongly.

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