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CMA Intermediate · Management Accounting · Applications of Marginal Costing in Short Term Decision Making

Arjun Textiles has a plant capacity of 50,000 machine hours. Product P earns a contribution of Rs 60 per unit and uses 2 hours; product Q earns Rs 90 per unit and uses 4 hours. Demand is ample for both. Fixed costs are Rs 4,00,000. What is the maximum profit by using the best product mix?

The best plan is to produce only P, which earns Rs 30 contribution per machine hour against Rs 22.50 for Q. 50,000 hours give Rs 15,00,000 contribution; after fixed costs of Rs 4,00,000 the profit is Rs 11,00,000.

  1. ARs 11,25,000
  2. BRs 7,25,000Correct
  3. CRs 18,75,000
  4. DRs 9,00,000

Explanation

Contribution per hour: P = 60/2 = Rs 30; Q = 90/4 = Rs 22.5. Make only P: 25,000 units x 60 = Rs 15,00,000. Less fixed cost 4,00,000 = Rs 11,00,000. Check: 50,000 hrs x 30 = 15,00,000, so profit is Rs 11,00,000.

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