Test 3: Marginal Costing: answer key

Question 1 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. Orion Precision Metals Ltd. manufactures three industrial components, A, B and C, used in hydraulic machinery. All three products require copper alloy as their principal raw material. Due to a temporary disruption in imports, the company has limited copper alloy available for its November 2026 production schedule. Management must determine the optimum product mix to maximise total contribution. Demand for all products is sufficient to absorb the quantities indicated below, subject to the respective maximum demand limits. Product cost and resource information: | Particulars | Product A | Product B | Product C | | Selling price per unit | ₹800 | ₹650 | ₹1,000 | | Variable cost per unit | ₹560 | ₹430 | ₹700 | | Contribution per unit | ₹240 | ₹220 | ₹300 | | Copper alloy required per unit | 3 kg | 2 kg | 4 kg | | Maximum market demand | 3,000 units | 4,000 units | 2,000 units | | Machine hours per unit | 2 | 1.5 | 3 | Available copper alloy is 19,000 kg. Practical machine capacity is 15,000 hours, while available skilled labour is 12,000 hours. Neither machine hours nor skilled labour hours restrict the production quantities that can be achieved using the available copper alloy. Normal process scrap of 2% is already incorporated into the standard variable cost and material requirement figures. There is no abnormal loss. The production manager confirms that all variable costs are relevant for computing contribution and that common fixed production expenses of ₹4,50,000 will remain unchanged irrespective of the selected product mix. Products can be manufactured simultaneously, and there are no minimum production commitments or contractual restrictions on the sales mix. All products manufactured will be sold during November, with no opening or closing inventory. The company cannot acquire additional copper alloy during the original production period, but management is considering an additional purchase for a possible extended production schedule. Income tax and financing costs are to be ignored.

Based on contribution per kg of copper alloy, which is the correct priority order for manufacturing Products A, B and C?

1. A, C, B
2. B, A, C (correct answer)
3. C, B, A
4. B, C, A

Answer: B — B, A, C

Explanation. Contribution per kg of copper alloy is calculated by dividing unit contribution by material required per unit. Product A: ₹240 ÷ 3 = ₹80 per kg. Product B: ₹220 ÷ 2 = ₹110 per kg. Product C: ₹300 ÷ 4 = ₹75 per kg. Therefore, the ranking is B, A and C. Option a incorrectly prioritises the highest contribution per unit rather than the highest contribution per kg of the scarce material.

Where it goes wrong. Ranking products by contribution per unit instead of contribution per unit of the limiting resource.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 2 · 2 marks · Chapter 14: Marginal Costing · hard

What is the optimum production mix of Products A, B and C using the available 19,000 kg of copper alloy?

1. A: 2,000 units; B: 4,000 units; C: 1,000 units
2. A: 3,000 units; B: 3,000 units; C: 1,000 units
3. A: 3,000 units; B: 4,000 units; C: Nil
4. A: 3,000 units; B: 4,000 units; C: 500 units (correct answer)

Answer: D — A: 3,000 units; B: 4,000 units; C: 500 units

Explanation. Product B has the highest contribution per kg and is produced first to its demand limit of 4,000 units, consuming 8,000 kg. Product A is next and requires 9,000 kg for 3,000 units. Remaining material = 19,000 − 8,000 − 9,000 = 2,000 kg. Product C requires 4 kg per unit, so 500 units can be produced. The proposed mix uses exactly 19,000 kg and satisfies all demand limits.

Where it goes wrong. Allocating material in descending order of contribution per unit rather than contribution per kg.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 3 · 2 marks · Chapter 14: Marginal Costing · medium

What is the monthly profit under the optimum production mix?

1. ₹17,50,000
2. ₹12,50,000
3. ₹13,00,000 (correct answer)
4. ₹14,50,000

Answer: C — ₹13,00,000

Explanation. Contribution from B = 4,000 × ₹220 = ₹8,80,000. Contribution from A = 3,000 × ₹240 = ₹7,20,000. Contribution from C = 500 × ₹300 = ₹1,50,000. Total contribution = ₹17,50,000. Deduct common fixed expenses of ₹4,50,000. Monthly profit = ₹17,50,000 − ₹4,50,000 = ₹13,00,000. Option a reports contribution without deducting fixed expenses.

Where it goes wrong. Reporting total contribution as profit without deducting common fixed expenses.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 4 · 2 marks · Chapter 14: Marginal Costing · hard

Suppose management obtains an additional 2,000 kg of copper alloy without changing selling prices or unit variable costs. What will be the additional contribution from the revised optimum production mix?

1. ₹1,50,000 (correct answer)
2. ₹1,20,000
3. ₹2,00,000
4. ₹3,00,000

Answer: A — ₹1,50,000

Explanation. The original production mix already satisfies the demand limits for B and A. The additional 2,000 kg must therefore be allocated to C, the next-ranked product. Each unit of C requires 4 kg, so additional output = 2,000 ÷ 4 = 500 units. Additional contribution = 500 × ₹300 = ₹1,50,000. Option b results from incorrectly applying A's contribution per unit to the additional production.

Where it goes wrong. Failing to respect the demand limits of higher-ranked products when allocating additional scarce resources.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 5 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. Vantage Industrial Machines Ltd. manufactures three types of precision machine components, X, Y and Z. The company operates a common automated machining facility. A major export order has increased demand beyond the available machine capacity, requiring management to determine the optimum production mix for the coming month. Machine hours are the only limiting resource. Raw materials and labour are available in sufficient quantities to satisfy the maximum demand of all three products. Relevant operating information: | Particulars | Product X | Product Y | Product Z | | Selling price per unit | ₹900 | ₹700 | ₹1,200 | | Variable cost per unit | ₹660 | ₹500 | ₹950 | | Contribution per unit | ₹240 | ₹200 | ₹250 | | Machine hours per unit | 4 | 2 | 5 | | Maximum demand | 2,000 units | 3,000 units | 1,600 units | The machining facility has 18,000 productive machine hours available for the month. Each machine hour is available for productive operations after deducting routine maintenance and normal breakdown allowances. The variable costs include direct materials, direct labour, variable machining overhead and variable packing expenses. Normal process scrap has already been incorporated into the product cost estimates. The company employs 40 machine operators at an average basic wage of ₹500 per productive shift. These wages are included in the variable manufacturing costs above and must not be added again while calculating contribution. Fixed manufacturing and administration expenses are ₹3,80,000 per month and will not change with the proposed production mix. The management has confirmed that all products manufactured can be sold immediately and that no product has a special contractual priority. Production can be divided freely among the three products in whole units. Management is also examining whether an additional 3,000 machine hours can be obtained through extended operations. The additional hours would not change the normal unit variable costs or selling prices. Assume that the additional capacity is available for the same month and that all revised production remains within practical demand limits.

Which is the correct priority ranking of Products X, Y and Z based on contribution per machine hour?

1. X, Z, Y
2. Z, X, Y
3. Y, X, Z (correct answer)
4. Y, Z, X

Answer: C — Y, X, Z

Explanation. Product X earns ₹240 contribution using 4 hours, giving ₹60 per machine hour. Product Y earns ₹200 using 2 hours, giving ₹100 per hour. Product Z earns ₹250 using 5 hours, giving ₹50 per hour. The correct priority is therefore Y, X and Z. The ranking must be based on the contribution generated by each scarce machine hour, not simply the contribution per unit.

Where it goes wrong. Using absolute contribution per unit instead of contribution per machine hour.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 6 · 2 marks · Chapter 14: Marginal Costing · hard

Determine the optimum production quantities of X, Y and Z using the available 18,000 machine hours.

1. X: 1,500; Y: 3,000; Z: 1,200
2. X: 2,000; Y: 3,000; Z: 800 (correct answer)
3. X: 2,000; Y: 2,000; Z: 1,200
4. X: 1,000; Y: 3,000; Z: 1,600

Answer: B — X: 2,000; Y: 3,000; Z: 800

Explanation. Product Y ranks first and can be produced to its demand limit of 3,000 units, using 6,000 hours. Product X ranks second and uses 8,000 hours for 2,000 units. Remaining capacity = 18,000 − 6,000 − 8,000 = 4,000 hours. Product Z requires 5 hours per unit, allowing 800 units. The proposed mix uses the entire 18,000-hour capacity without exceeding demand.

Where it goes wrong. Allocating machine hours equally instead of exhausting demand for products with higher contribution per machine hour.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 7 · 2 marks · Chapter 14: Marginal Costing · medium

What profit will Vantage Industrial Machines Ltd. earn under the optimum production mix?

1. ₹12,80,000
2. ₹8,20,000
3. ₹8,50,000
4. ₹9,00,000 (correct answer)

Answer: D — ₹9,00,000

Explanation. Contribution from Y = 3,000 × ₹200 = ₹6,00,000. Contribution from X = 2,000 × ₹240 = ₹4,80,000. Contribution from Z = 800 × ₹250 = ₹2,00,000. Total contribution = ₹12,80,000. Deduct fixed expenses of ₹3,80,000 to arrive at profit of ₹9,00,000. Option a is the total contribution and incorrectly ignores fixed expenses.

Where it goes wrong. Ignoring fixed expenses after determining the optimum contribution.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 8 · 2 marks · Chapter 14: Marginal Costing · hard

Management obtains 3,000 additional machine hours. Assuming sufficient remaining demand for Product Z, what additional contribution can be earned by optimally utilising these hours?

1. ₹1,50,000 (correct answer)
2. ₹1,20,000
3. ₹1,80,000
4. ₹2,00,000

Answer: A — ₹1,50,000

Explanation. The original optimum mix satisfies the maximum demands for Y and X. Product Z is the next-ranked product and contributes ₹250 per unit using 5 machine hours. Additional output = 3,000 ÷ 5 = 600 units. Additional contribution = 600 × ₹250 = ₹1,50,000. The resulting output of Z is 1,400 units, which is within its maximum demand of 1,600 units.

Where it goes wrong. Applying the highest contribution per unit rather than the contribution per hour of the next-ranked product.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 9 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. Sterling Engineering Works Ltd. manufactures three types of precision assemblies, M, N and P, for automobile manufacturers. Each assembly requires skilled technicians for specialised fitting and calibration. The company has experienced a shortage of skilled technicians following an increase in industry-wide demand. Available skilled labour hours must therefore be allocated between the three products to maximise total contribution. The following data relate to the monthly production plan: | Particulars | Product M | Product N | Product P | | Selling price per unit | ₹750 | ₹1,000 | ₹500 | | Total variable cost per unit | ₹510 | ₹650 | ₹320 | | Contribution per unit | ₹240 | ₹350 | ₹180 | | Skilled labour hours per unit | 2 | 5 | 1 | | Maximum market demand | 1,500 units | 1,200 units | 2,500 units | | Machine hours per unit | 3 | 2 | 1 | The company has 8,500 skilled labour hours available during the month. Machine capacity is 18,000 hours and raw material availability is sufficient for the production of all products at maximum demand. The normal skilled labour wage is ₹200 per hour and is already included in the variable costs. Normal process losses are reflected in the standard material quantities. Fixed manufacturing and administration expenses are ₹4,20,000 per month. The production manager proposes to manufacture products in descending order of contribution per skilled labour hour, subject to maximum market demand. Any unused skilled labour hours may be carried forward only if management decides not to undertake additional operations. An alternative proposal is to obtain 1,000 additional skilled labour hours through overtime. The normal wages for these additional hours are already reflected in the product variable costs, but an additional overtime premium of ₹55 per hour would be payable. The additional hours can be deployed entirely towards Product N, for which sufficient unfulfilled demand exists. No additional fixed expenses will arise. Assume all production is sold, no inventory is accumulated, and the overtime premium is an incremental cost for the proposed additional production.

Determine the correct ranking of Products M, N and P based on contribution per skilled labour hour.

1. M, N, P
2. N, P, M
3. M, P, N
4. P, M, N (correct answer)

Answer: D — P, M, N

Explanation. Contribution per skilled labour hour is calculated as follows: M = ₹240 ÷ 2 = ₹120; N = ₹350 ÷ 5 = ₹70; P = ₹180 ÷ 1 = ₹180. Therefore, Product P ranks first, followed by M and N. Although Product N earns the highest absolute contribution per unit, it consumes five skilled hours and consequently produces the lowest contribution per scarce labour hour.

Where it goes wrong. Prioritising the highest contribution per unit without considering the labour hours consumed.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 10 · 2 marks · Chapter 14: Marginal Costing · hard

What is the optimum production mix using the available 8,500 skilled labour hours?

1. M: 1,000; N: 800; P: 2,500
2. M: 1,500; N: 800; P: 2,000
3. M: 1,500; N: 600; P: 2,500 (correct answer)
4. M: 1,200; N: 800; P: 2,500

Answer: C — M: 1,500; N: 600; P: 2,500

Explanation. Produce P first to its demand limit of 2,500 units, consuming 2,500 skilled hours. Next, produce M up to 1,500 units, consuming 3,000 hours. Remaining hours = 8,500 − 2,500 − 3,000 = 3,000. Product N requires 5 hours per unit, allowing 600 units. Thus, the optimum mix is M 1,500, N 600 and P 2,500 units, using all available skilled labour hours.

Where it goes wrong. Producing all units of the highest absolute-contribution product before considering contribution per skilled labour hour.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 11 · 2 marks · Chapter 14: Marginal Costing · medium

What is the monthly profit under the optimum production mix before considering any additional overtime?

1. ₹6,00,000 (correct answer)
2. ₹10,20,000
3. ₹5,80,000
4. ₹6,50,000

Answer: A — ₹6,00,000

Explanation. Contribution from P = 2,500 × ₹180 = ₹4,50,000. Contribution from M = 1,500 × ₹240 = ₹3,60,000. Contribution from N = 600 × ₹350 = ₹2,10,000. Total contribution = ₹10,20,000. Deduct monthly fixed expenses of ₹4,20,000 to arrive at profit of ₹6,00,000. Option b reports contribution without deducting fixed expenses.

Where it goes wrong. Confusing total contribution with operating profit.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 12 · 2 marks · Chapter 14: Marginal Costing · hard

Management proposes obtaining 1,000 additional skilled labour hours at an overtime premium of ₹55 per hour. The additional hours will be used entirely for Product N. Should management accept the proposal, and what will be the net increase in monthly profit?

1. Reject; monthly profit will decrease by ₹15,000
2. Accept; monthly profit will increase by ₹15,000 (correct answer)
3. Accept; monthly profit will increase by ₹70,000
4. Accept; monthly profit will increase by ₹55,000

Answer: B — Accept; monthly profit will increase by ₹15,000

Explanation. Product N generates ₹350 contribution using 5 skilled hours, equal to ₹70 per hour. Additional output = 1,000 ÷ 5 = 200 units. Additional contribution = 200 × ₹350 = ₹70,000. Overtime premium = 1,000 × ₹55 = ₹55,000. Net increase in profit = ₹70,000 − ₹55,000 = ₹15,000. Therefore, the proposal should be accepted because incremental contribution exceeds the incremental overtime premium.

Where it goes wrong. Comparing overtime premium with contribution per unit instead of contribution per skilled labour hour.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 13 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. A manufacturer produces three products using a scarce imported alloy. The following information is available: | Particulars | A | B | C | | Contribution per unit | ₹180 | ₹210 | ₹250 | | Alloy required per unit | 3 kg | 3 kg | 5 kg | What is the correct ranking based on contribution per kg of alloy?

A manufacturer produces three products using a scarce imported alloy. The following information is available: | Particulars | A | B | C | | Contribution per unit | ₹180 | ₹210 | ₹250 | | Alloy required per unit | 3 kg | 3 kg | 5 kg | What is the correct ranking based on contribution per kg of alloy?

1. B, A, C (correct answer)
2. A, C, B
3. C, B, A
4. B, C, A

Answer: A — B, A, C

Explanation. Contribution per kg is calculated by dividing unit contribution by the material requirement. A = ₹180 ÷ 3 = ₹60 per kg. B = ₹210 ÷ 3 = ₹70 per kg. C = ₹250 ÷ 5 = ₹50 per kg. Accordingly, B ranks first, A second and C third. Option c incorrectly ranks products by absolute contribution per unit, ignoring the consumption of scarce alloy.

Where it goes wrong. Ranking products on absolute contribution rather than contribution per kg of scarce material.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 14 · 2 marks · Chapter 14: Marginal Costing · hard

Scenario. A company manufactures three components using a scarce automated machine. The following information is available: | Particulars | P | Q | R | | Contribution per unit | ₹360 | ₹280 | ₹500 | | Machine hours per unit | 4 | 2 | 5 | Which is the correct descending order of priority?

A company manufactures three components using a scarce automated machine. The following information is available: | Particulars | P | Q | R | | Contribution per unit | ₹360 | ₹280 | ₹500 | | Machine hours per unit | 4 | 2 | 5 | Which is the correct descending order of priority?

1. P, Q, R
2. R, P, Q
3. Q, R, P (correct answer)
4. Q, P, R

Answer: C — Q, R, P

Explanation. Contribution per machine hour: P = ₹360 ÷ 4 = ₹90; Q = ₹280 ÷ 2 = ₹140; R = ₹500 ÷ 5 = ₹100. Hence, the ranking is Q, R and P. Product R has the highest contribution per unit, but Product Q generates the highest contribution from each hour of the limiting machine. Therefore, Q should receive production priority.

Where it goes wrong. Selecting the product with the highest unit contribution without accounting for machine-hour consumption.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 15 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. A precision assembly plant has limited skilled technicians. The following contribution and labour requirements are available: | Particulars | A | B | C | | Contribution per unit | ₹240 | ₹210 | ₹360 | | Skilled labour hours per unit | 3 | 2 | 4 | Which product should be manufactured first?

A precision assembly plant has limited skilled technicians. The following contribution and labour requirements are available: | Particulars | A | B | C | | Contribution per unit | ₹240 | ₹210 | ₹360 | | Skilled labour hours per unit | 3 | 2 | 4 | Which product should be manufactured first?

1. Product A
2. Product C
3. All three products have equal priority
4. Product B (correct answer)

Answer: D — Product B

Explanation. Contribution per skilled labour hour is A = ₹240 ÷ 3 = ₹80; B = ₹210 ÷ 2 = ₹105; C = ₹360 ÷ 4 = ₹90. Product B generates the highest contribution of ₹105 per scarce labour hour. Therefore, it should be prioritised, subject to its market demand limit. Option b is incorrect because Product C's higher unit contribution is achieved using twice the skilled hours of Product B.

Where it goes wrong. Comparing absolute unit contributions instead of contribution earned per scarce labour hour.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 16 · 2 marks · Chapter 14: Marginal Costing · hard

Scenario. A factory plans to produce 2,000 units of Product U and 1,500 units of Product V. The following resources are required: | Resource | U per unit | V per unit | Available | | Raw material | 2 kg | 3 kg | 9,000 kg | | Machine time | 1.5 hours | 2 hours | 6,500 hours | | Skilled labour | 1 hour | 2 hours | 4,500 hours | Which resource is the limiting factor?

A factory plans to produce 2,000 units of Product U and 1,500 units of Product V. The following resources are required: | Resource | U per unit | V per unit | Available | | Raw material | 2 kg | 3 kg | 9,000 kg | | Machine time | 1.5 hours | 2 hours | 6,500 hours | | Skilled labour | 1 hour | 2 hours | 4,500 hours | Which resource is the limiting factor?

1. Raw material
2. Skilled labour (correct answer)
3. Machine hours
4. None of the resources

Answer: B — Skilled labour

Explanation. Raw material required = (2,000 × 2) + (1,500 × 3) = 8,500 kg, against 9,000 kg available. Machine hours required = (2,000 × 1.5) + (1,500 × 2) = 6,000 hours, against 6,500 available. Skilled labour required = 2,000 + 3,000 = 5,000 hours, against 4,500 available. Skilled labour therefore creates a shortage of 500 hours and is the limiting resource.

Where it goes wrong. Identifying the resource with the highest total consumption instead of comparing total requirements with actual availability.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 17 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. A manufacturer has 4,000 kg of a special resin available. The contribution and material requirements of three products are: | Particulars | A | B | C | | Contribution per unit | ₹100 | ₹180 | ₹90 | | Resin per unit | 2 kg | 3 kg | 1 kg | | Maximum demand | 1,000 | 800 | 500 | What is the optimum production mix?

A manufacturer has 4,000 kg of a special resin available. The contribution and material requirements of three products are: | Particulars | A | B | C | | Contribution per unit | ₹100 | ₹180 | ₹90 | | Resin per unit | 2 kg | 3 kg | 1 kg | | Maximum demand | 1,000 | 800 | 500 | What is the optimum production mix?

1. A: 550; B: 800; C: 500 (correct answer)
2. A: 1,000; B: 500; C: 0
3. A: 400; B: 800; C: 500
4. A: 1,000; B: 800; C: 0

Answer: A — A: 550; B: 800; C: 500

Explanation. Contribution per kg of resin: A = ₹50, B = ₹60 and C = ₹90. Produce C to its demand limit of 500 units, consuming 500 kg. Produce B to its demand limit of 800 units, consuming 2,400 kg. Remaining resin = 4,000 − 500 − 2,400 = 1,100 kg. This permits 550 units of A. The resulting mix uses all 4,000 kg without exceeding demand.

Where it goes wrong. Failing to allocate the remaining material to the next-ranked product after satisfying the demand of higher-ranked products.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 18 · 2 marks · Chapter 14: Marginal Costing · hard

Scenario. A manufacturer can produce either Part A or Part B. Three resources are available for production: | Resource | Availability | | Alloy | 9,000 kg | | Machine P | 2,500 hours | | Machine Q | 3,000 hours | | Requirement per unit | Part A | Part B | | Alloy | 1.5 kg | 2 kg | | Machine P | 0.5 hour | 0.25 hour | | Machine Q | 0.75 hour | 0.5 hour | | Contribution per unit | ₹120 | ₹110 | Which alternative provides the higher total contribution when each part is manufactured using its maximum feasible quantity?

A manufacturer can produce either Part A or Part B. Three resources are available for production: | Resource | Availability | | Alloy | 9,000 kg | | Machine P | 2,500 hours | | Machine Q | 3,000 hours | | Requirement per unit | Part A | Part B | | Alloy | 1.5 kg | 2 kg | | Machine P | 0.5 hour | 0.25 hour | | Machine Q | 0.75 hour | 0.5 hour | | Contribution per unit | ₹120 | ₹110 | Which alternative provides the higher total contribution when each part is manufactured using its maximum feasible quantity?

1. Part A; ₹4,95,000
2. Part B; ₹4,80,000
3. Part A; ₹4,80,000
4. Part B; ₹4,95,000 (correct answer)

Answer: D — Part B; ₹4,95,000

Explanation. For A, maximum units permitted by alloy, Machine P and Machine Q are 6,000, 5,000 and 4,000 respectively. Feasible output is 4,000 units, giving contribution of ₹4,80,000. For B, the respective limits are 4,500, 10,000 and 6,000 units. Feasible output is 4,500 units, giving contribution of ₹4,95,000. Part B is therefore preferable by ₹15,000. The minimum resource-based quantity determines feasible production.

Where it goes wrong. Selecting the product with higher contribution per unit without first determining the maximum feasible output under every resource constraint.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 19 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. A company can manufacture only one of three alternative products during a production period. The following information is available: | Particulars | X | Y | Z | | Contribution per unit | ₹180 | ₹150 | ₹300 | | Market demand | 3,000 | 1,500 | 1,000 | | Production capacity | 2,000 | 2,500 | 800 | What is the opportunity cost of selecting Product X?

A company can manufacture only one of three alternative products during a production period. The following information is available: | Particulars | X | Y | Z | | Contribution per unit | ₹180 | ₹150 | ₹300 | | Market demand | 3,000 | 1,500 | 1,000 | | Production capacity | 2,000 | 2,500 | 800 | What is the opportunity cost of selecting Product X?

1. ₹2,25,000
2. ₹3,60,000
3. ₹2,40,000 (correct answer)
4. ₹4,65,000

Answer: C — ₹2,40,000

Explanation. Possible contribution from X = 2,000 × ₹180 = ₹3,60,000. From Y, it is 1,500 × ₹150 = ₹2,25,000, since demand is lower than capacity. From Z, it is 800 × ₹300 = ₹2,40,000, since capacity is lower than demand. If X is selected, the maximum contribution forgone is ₹2,40,000 from the alternative Z. This represents the opportunity cost of the decision.

Where it goes wrong. Taking the sum of alternative contributions or ignoring the lower of market demand and production capacity.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 20 · 2 marks · Chapter 14: Marginal Costing · hard

Scenario. A company has 5,000 skilled labour hours available for two products. The following information is given: | Particulars | D | E | | Contribution per unit | ₹240 | ₹150 | | Skilled labour hours per unit | 3 | 2 | | Maximum demand | 1,000 units | 2,000 units | What is the maximum total contribution under the optimum production mix?

A company has 5,000 skilled labour hours available for two products. The following information is given: | Particulars | D | E | | Contribution per unit | ₹240 | ₹150 | | Skilled labour hours per unit | 3 | 2 | | Maximum demand | 1,000 units | 2,000 units | What is the maximum total contribution under the optimum production mix?

1. ₹3,00,000
2. ₹3,90,000 (correct answer)
3. ₹4,50,000
4. ₹3,60,000

Answer: B — ₹3,90,000

Explanation. Contribution per labour hour: D = ₹240 ÷ 3 = ₹80; E = ₹150 ÷ 2 = ₹75. Produce D first to its demand limit of 1,000 units, using 3,000 hours. The remaining 2,000 hours permit 1,000 units of E. Contribution from D = ₹2,40,000 and from E = ₹1,50,000. Total contribution = ₹3,90,000. Both demand limits are respected.

Where it goes wrong. Ranking by contribution per unit and producing E first, despite its lower contribution per labour hour.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 21 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. A company has 6,000 kg of specialised raw material. Two products have the following particulars: | Particulars | A | B | | Contribution per unit | ₹300 | ₹220 | | Material required per unit | 5 kg | 2 kg | | Maximum demand | 1,000 units | 2,000 units | Determine the optimum production quantities of A and B.

A company has 6,000 kg of specialised raw material. Two products have the following particulars: | Particulars | A | B | | Contribution per unit | ₹300 | ₹220 | | Material required per unit | 5 kg | 2 kg | | Maximum demand | 1,000 units | 2,000 units | Determine the optimum production quantities of A and B.

1. A: 400 units; B: 2,000 units (correct answer)
2. A: 1,000 units; B: 500 units
3. A: 600 units; B: 1,500 units
4. A: 1,000 units; B: 2,000 units

Answer: A — A: 400 units; B: 2,000 units

Explanation. Contribution per kg: A = ₹300 ÷ 5 = ₹60; B = ₹220 ÷ 2 = ₹110. Therefore, B receives priority and is produced to its demand limit of 2,000 units, consuming 4,000 kg. Remaining material = 2,000 kg, permitting 400 units of A. Total utilisation is 6,000 kg. Option b reverses the priority and fails to maximise contribution from the scarce material.

Where it goes wrong. Allocating scarce material to the product with the higher contribution per unit instead of the higher contribution per kg.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 22 · 2 marks · Chapter 14: Marginal Costing · hard

Scenario. Two products, P and Q, use the same limiting machine. Product P generates ₹180 contribution per unit using 3 machine hours. Product Q generates ₹120 contribution per unit using 2 machine hours. Both products have sufficient market demand. What is the correct conclusion when allocating the scarce machine hours?

Two products, P and Q, use the same limiting machine. Product P generates ₹180 contribution per unit using 3 machine hours. Product Q generates ₹120 contribution per unit using 2 machine hours. Both products have sufficient market demand. What is the correct conclusion when allocating the scarce machine hours?

1. P should receive all machine hours because its contribution per unit is higher.
2. Q should receive all machine hours because it uses fewer hours per unit.
3. P should receive priority because it uses more machine hours.
4. Both products generate equal contribution per machine hour, so any feasible allocation of the available hours gives the same total contribution. (correct answer)

Answer: D — Both products generate equal contribution per machine hour, so any feasible allocation of the available hours gives the same total contribution.

Explanation. Product P contribution per machine hour = ₹180 ÷ 3 = ₹60. Product Q contribution per machine hour = ₹120 ÷ 2 = ₹60. Both products therefore generate identical contribution from each limiting machine hour. Provided sufficient demand exists and the available hours can be fully utilised, reallocating machine hours between them does not alter total contribution. Their different absolute unit contributions do not establish a priority.

Where it goes wrong. Assuming that the product with the higher contribution per unit must always be prioritised.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 23 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. A manufacturer has three resources available for two alternative products: | Resource | Availability | | Raw material | 12,000 kg | | Machine hours | 4,500 hours | | Skilled labour hours | 6,000 hours | | Requirement per unit | Product X | Product Y | | Raw material | 3 kg | 2 kg | | Machine hours | 1.5 hours | 1 hour | | Skilled labour hours | 1 hour | 2 hours | | Contribution per unit | ₹180 | ₹190 | If the company can manufacture only one product during the period, which alternative will maximise total contribution?

A manufacturer has three resources available for two alternative products: | Resource | Availability | | Raw material | 12,000 kg | | Machine hours | 4,500 hours | | Skilled labour hours | 6,000 hours | | Requirement per unit | Product X | Product Y | | Raw material | 3 kg | 2 kg | | Machine hours | 1.5 hours | 1 hour | | Skilled labour hours | 1 hour | 2 hours | | Contribution per unit | ₹180 | ₹190 | If the company can manufacture only one product during the period, which alternative will maximise total contribution?

1. Product X; 3,000 units; ₹5,40,000
2. Product X; 4,000 units; ₹7,20,000
3. Product Y; 3,000 units; ₹5,70,000 (correct answer)
4. Product Y; 4,500 units; ₹8,55,000

Answer: C — Product Y; 3,000 units; ₹5,70,000

Explanation. Maximum output of X under raw material, machine and labour constraints is 4,000, 3,000 and 6,000 units respectively. Feasible output is 3,000 units, generating ₹5,40,000. For Y, the respective limits are 6,000, 4,500 and 3,000 units. Feasible output is therefore 3,000 units, generating ₹5,70,000. Product Y is preferable and earns ₹30,000 more contribution.

Where it goes wrong. Using the resource that permits the highest output instead of identifying the minimum feasible production quantity for each product.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 24 · 2 marks · Chapter 14: Marginal Costing · hard

Scenario. A manufacturer has already satisfied the demand for its higher-ranked products under a machine-hour constraint. Product K is the next product in the production priority order. Its contribution is ₹280 per unit and it requires 4 machine hours per unit. At least 100 additional units can be sold. Management is considering acquiring 200 additional machine hours. What is the maximum additional contribution and the maximum premium payable per additional machine hour?

A manufacturer has already satisfied the demand for its higher-ranked products under a machine-hour constraint. Product K is the next product in the production priority order. Its contribution is ₹280 per unit and it requires 4 machine hours per unit. At least 100 additional units can be sold. Management is considering acquiring 200 additional machine hours. What is the maximum additional contribution and the maximum premium payable per additional machine hour?

1. ₹12,000; ₹60 per hour
2. ₹14,000; ₹70 per hour (correct answer)
3. ₹16,000; ₹80 per hour
4. ₹28,000; ₹140 per hour

Answer: B — ₹14,000; ₹70 per hour

Explanation. Contribution per machine hour = ₹280 ÷ 4 = ₹70. Additional production possible = 200 ÷ 4 = 50 units, which is within the available additional demand of 100 units. Additional contribution = 50 × ₹280 = ₹14,000. Therefore, the maximum incremental premium payable per machine hour is ₹70, equivalent to the additional contribution generated by one scarce machine hour. A higher premium would eliminate the incremental benefit.

Where it goes wrong. Using contribution per unit as the maximum permissible premium for one additional machine hour.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)

Question 25 · 2 marks · Chapter 14: Marginal Costing · medium

Scenario. A manufacturer has 10,000 kg of specialised raw material available. Three products have the following particulars: | Particulars | P | Q | R | | Contribution per unit | ₹180 | ₹150 | ₹280 | | Material required per unit | 3 kg | 2 kg | 4 kg | | Maximum demand | 3,000 units | 2,000 units | 1,500 units | What is the maximum total contribution that can be earned using the available material?

A manufacturer has 10,000 kg of specialised raw material available. Three products have the following particulars: | Particulars | P | Q | R | | Contribution per unit | ₹180 | ₹150 | ₹280 | | Material required per unit | 3 kg | 2 kg | 4 kg | | Maximum demand | 3,000 units | 2,000 units | 1,500 units | What is the maximum total contribution that can be earned using the available material?

1. ₹7,20,000 (correct answer)
2. ₹6,90,000
3. ₹7,80,000
4. ₹6,50,000

Answer: A — ₹7,20,000

Explanation. Contribution per kg: P = ₹180 ÷ 3 = ₹60; Q = ₹150 ÷ 2 = ₹75; R = ₹280 ÷ 4 = ₹70. Priority is Q, R and P. Produce Q to its demand limit of 2,000 units, using 4,000 kg. Produce R to its demand limit of 1,500 units, using 6,000 kg. All 10,000 kg are consumed. Total contribution = (2,000 × ₹150) + (1,500 × ₹280) = ₹3,00,000 + ₹4,20,000 = ₹7,20,000.

Where it goes wrong. Prioritising Product R because of its higher absolute unit contribution instead of ranking contribution per kg of scarce raw material.

Authority. ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)