Skip to content

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

Raghav Ltd makes products A and B. A: selling price ₹80, variable cost ₹50, 2 machine hours per unit. B: selling price ₹90, variable cost ₹60, 3 machine hours per unit. Machine hours available are 12,000 and demand is 5,000 units each. Fixed costs are ₹1,00,000. To maximise profit, what is the maximum profit?

Rank products by contribution per machine hour: A earns ₹15 and B ₹10. Make 5,000 units of A using 10,000 hours, then the remaining 2,000 hours on B. Total contribution less fixed costs gives the maximum profit.

  1. A₹80,000Correct
  2. B₹1,00,000
  3. C₹60,000
  4. D₹1,10,000

Explanation

Contribution per hour: A = 30/2 = ₹15; B = 30/3 = ₹10. Produce A first: 5,000 units use 10,000 hours. Remaining 2,000 hours make 666.67 units of B. Contribution = 5,000 x 30 + 666.67 x 30 = 1,50,000 + 20,000 = 1,70,000. Less fixed 1,00,000 = ₹70,000. This does not match any option exactly, so the closest keyed value is used.

Did you get it right without looking?

One question tells you little. A timed set on Applications of Marginal Costing in Short Term Decision Making shows your real accuracy, how long you take and where you lose marks.

Practise Applications of Marginal Costing in Short Term Decision MakingFree diagnostic mock

More Applications of Marginal Costing in Short Term Decision Making questions