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

Mehta Plastics Ltd finds that machine hours are limited. Product S has a selling price of ₹100, variable cost of ₹60 and needs 5 machine hours. Product T has a selling price of ₹70, variable cost of ₹40 and needs 2 machine hours. Fixed costs are common. Which product should be given priority?

T should be given priority. With machine hours as the key factor, products are ranked by contribution per machine hour. T earns ₹15 per hour (30 divided by 2) while S earns only ₹8 per hour (40 divided by 5), even though S has a higher contribution per unit.

  1. AS, because its contribution per unit is ₹40 against ₹30
  2. BT, because its contribution per machine hour is ₹15 against ₹8Correct
  3. CS, because its contribution to sales ratio is higher
  4. DT, because its selling price is lower

Explanation

S contribution = 100 - 60 = ₹40, per hour 40/5 = ₹8. T contribution = 70 - 40 = ₹30, per hour 30/2 = ₹15. Contribution per limiting hour decides ranking, so T has priority. S has a higher unit contribution, but that is the wrong base.

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