CA Intermediate · Cost and Management Accounting · Marginal Costing
Hind Tools makes two products, A and B. A sells at ₹100 with variable cost ₹60; B sells at ₹80 with variable cost ₹56. Each unit of A needs 4 machine hours and each unit of B needs 2 machine hours. Machine hours are the limiting factor. Demand is sufficient for both. Which ranking should be followed for production?
Product B should be produced first because contribution per machine hour is ₹12 against ₹10 for A. When machine hours are the limiting factor, products are ranked by contribution per unit of the scarce resource, not by contribution per unit or by P/V ratio.
- AA first, because its contribution per unit is higher
- BB first, because its contribution per machine hour is higherCorrect
- CA first, because its P/V ratio is higher
- DBoth equally, because contribution per rupee of sales is similar
Explanation
Contribution per unit: A = 40, B = 24. Per machine hour: A = 40/4 = ₹10, B = 24/2 = ₹12. With machine hours limiting, B ranks first. Ranking by contribution per unit misleads. P/V ratio is A 40% and B 30%, so A is higher on P/V, but that is not the correct basis for a limiting factor.
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