CA Inter P4 · Chapter 13
Marginal Costing MCQs with Answers
10 multiple-choice questions on Marginal Costing for CA Inter P4 Cost and Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A product sells at ₹250 per unit with a variable cost of ₹160 per unit. The P/V ratio is:
- A) 64%
- B) 56.25%
- C) 30%
- D) 36%
Show answer & explanation
Answer: D) 36%
Contribution per unit = ₹250 - ₹160 = ₹90. P/V ratio = contribution / sales x 100 = 90 / 250 x 100 = 36%. Dividing contribution by variable cost (56.25%) is a common error.
Question 2
For the same product (selling price ₹250, variable cost ₹160 per unit), fixed costs are ₹10,80,000 per annum. The break-even sales are:
- A) ₹19,20,000
- B) ₹30,00,000
- C) ₹16,87,500
- D) ₹27,00,000
Show answer & explanation
Answer: B) ₹30,00,000
Contribution per unit = ₹90. Break-even units = ₹10,80,000 / ₹90 = 12,000 units. Break-even sales = 12,000 x ₹250 = ₹30,00,000. Alternatively, ₹10,80,000 / 36% = ₹30,00,000.
Question 3
With break-even sales of ₹30,00,000 and a P/V ratio of 36%, actual sales for the year are ₹40,00,000. The profit for the year is:
- A) ₹3,60,000
- B) ₹10,00,000
- C) ₹14,40,000
- D) ₹2,50,000
Show answer & explanation
Answer: A) ₹3,60,000
Margin of safety = actual sales - break-even sales = ₹40,00,000 - ₹30,00,000 = ₹10,00,000. Profit = margin of safety x P/V ratio = ₹10,00,000 x 36% = ₹3,60,000. Check: contribution ₹14,40,000 - fixed costs ₹10,80,000 = ₹3,60,000.
Question 4
Sales and profit of a company for two periods were: Period 1 sales ₹12,00,000, profit ₹1,10,000; Period 2 sales ₹15,00,000, profit ₹1,82,000. Assuming the same selling price, variable cost ratio and fixed costs in both periods, the fixed cost is:
- A) ₹2,88,000
- B) ₹3,60,000
- C) ₹1,78,000
- D) ₹1,10,000
Show answer & explanation
Answer: C) ₹1,78,000
P/V ratio = change in profit / change in sales = (₹1,82,000 - ₹1,10,000) / (₹15,00,000 - ₹12,00,000) = ₹72,000 / ₹3,00,000 = 24%. Contribution in Period 1 = ₹12,00,000 x 24% = ₹2,88,000. Fixed cost = contribution - profit = ₹2,88,000 - ₹1,10,000 = ₹1,78,000. Check with Period 2: ₹3,60,000 - ₹1,82,000 = ₹1,78,000.
Question 5
Fixed costs are ₹1,78,000 and the P/V ratio is 24%. The sales required to earn a profit of ₹2,30,000 are:
- A) ₹9,58,333.33
- B) ₹7,41,666.67
- C) ₹17,00,000.00
- D) ₹5,36,842.11
Show answer & explanation
Answer: C) ₹17,00,000.00
Required sales = (fixed cost + desired profit) / P/V ratio = (₹1,78,000 + ₹2,30,000) / 24% = ₹4,08,000 / 0.24 = ₹17,00,000.
Question 6
Products A and B have contributions of ₹60 and ₹84 per unit respectively. Product A requires 3 machine hours per unit and B requires 6 machine hours per unit. Machine hours are the key factor and demand for both is unlimited. The company should:
- A) Prefer product B, as its contribution per unit is higher
- B) Prefer product B, as its contribution per machine hour is ₹14 against ₹20 for A
- C) Be indifferent, as both products earn the same total contribution
- D) Prefer product A, as its contribution per machine hour is ₹20 against ₹14 for B
Show answer & explanation
Answer: D) Prefer product A, as its contribution per machine hour is ₹20 against ₹14 for B
When a resource is limited, products are ranked by contribution per unit of the key factor. A: ₹60 / 3 = ₹20 per machine hour; B: ₹84 / 6 = ₹14 per machine hour. Each hour used for A earns ₹6 more contribution, so A should be preferred.
Question 7
In a period with no opening stock, a company produced 10,000 units and sold 8,500 units. Fixed production overheads were ₹3,00,000. Compared with marginal costing, profit under absorption costing will be:
- A) Higher by ₹45,000
- B) Lower by ₹45,000
- C) Higher by ₹2,55,000
- D) The same, as fixed costs are identical
Show answer & explanation
Answer: A) Higher by ₹45,000
Fixed overhead per unit = ₹3,00,000 / 10,000 = ₹30. Under absorption costing, closing stock of 1,500 units carries 1,500 x ₹30 = ₹45,000 of fixed overhead to the next period. Under marginal costing the full ₹3,00,000 is charged in this period. Absorption costing profit is therefore higher by ₹45,000.
Question 8
On a break-even chart, a large angle of incidence indicates that:
- A) The fixed costs of the business are very high
- B) The business earns profit at a high rate once fixed costs are covered
- C) The margin of safety is necessarily very low
- D) Variable cost per unit is higher than selling price
Show answer & explanation
Answer: B) The business earns profit at a high rate once fixed costs are covered
The angle of incidence is the angle at which the sales line cuts the total cost line. A large angle means a high rate of profit after the break-even point, reflecting a high contribution (P/V) ratio. A small angle indicates that profits rise slowly with sales.
Question 9
A component can be made in-house at a variable cost of ₹74 per unit, or bought from a supplier at ₹82 per unit. Existing fixed costs of ₹2,50,000 will not change whichever option is chosen, and there is spare capacity. For 15,000 units, the company should:
- A) Make the component, saving ₹1,20,000
- B) Buy the component, saving ₹1,30,000
- C) Make the component, saving ₹3,70,000
- D) Buy the component, saving ₹1,20,000
Show answer & explanation
Answer: A) Make the component, saving ₹1,20,000
Fixed costs are unaffected and therefore irrelevant. Relevant cost of making = ₹74 per unit against a purchase price of ₹82. Saving from making = (₹82 - ₹74) x 15,000 = ₹1,20,000.
Question 10
Method I of production has fixed costs of ₹3,00,000 and variable cost of ₹45 per unit. Method II has fixed costs of ₹4,80,000 and variable cost of ₹33 per unit. The cost indifference point is:
- A) 15,000 units
- B) 25,000 units
- C) 14,545 units
- D) 5,455 units
Show answer & explanation
Answer: A) 15,000 units
At the indifference point, total costs are equal: 3,00,000 + 45x = 4,80,000 + 33x, so 12x = 1,80,000 and x = 15,000 units. Below this output Method I (lower fixed cost) is cheaper; above it Method II (lower variable cost) is cheaper.