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

Rohit Components Ltd makes products P and Q. P gives a contribution of ₹60 per unit and uses 2 machine hours; Q gives a contribution of ₹90 per unit and uses 4 machine hours. Machine hours are the only limiting factor. Which statement is correct?

P should be preferred. When machine hours are the only limiting factor, products are ranked by contribution per machine hour. P earns ₹30 per hour (60 divided by 2) while Q earns ₹22.50 per hour (90 divided by 4), so P is more profitable per scarce hour.

  1. AQ should be preferred because its contribution per unit is higher
  2. BP should be preferred because its contribution per machine hour is ₹30 against ₹22.50 for QCorrect
  3. CQ should be preferred because it uses more machine hours
  4. DBoth products are equally profitable per machine hour

Explanation

Contribution per machine hour: P = 60/2 = ₹30; Q = 90/4 = ₹22.50. With machine hours limiting, ranking is by contribution per hour, so P ranks first. Choosing Q on contribution per unit ignores the scarce resource.

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