Limiting-factor decision picks the alternative that maximises:
ASales per unit
BContribution per unit of limiting factor
CProfit margin per rupee of sales
DVariable cost per unit
Answer & Solution
Correct answer: B. Contribution per unit of limiting factor
1. When a resource is limited (e.g. machine hours, material), the firm should maximise return per unit of that scarce resource.
2. The relevant ranking factor is contribution per unit of the limiting factor.
3. Sales per unit or margin per rupee ignore the scarcity of the constraining resource.
4. Hence the correct criterion is contribution per unit of limiting factor.
_Source: ICAI BoS Inter Paper 3, Ch 14 "Marginal Costing", §14.9 ¶2_
Related questions
At the break-even point,A higher contribution to sales ratio implies thatIf the margin of safety is 21.875 per cent of sales, break-even sales are what share of saMargin of safety isFixed cost is 1,50,000 and contribution per unit is 15. Units needed to earn a profit of 2Fixed cost is 1,50,000 and contribution per unit is 15. The break-even point in units isSelling price is 30 per unit and variable cost is 15 per unit. The P/V ratio isContribution is defined as