Under Capital Rationing the Profitability Index Is Used to Select

question 25

Multiple Choice

Under capital rationing the profitability index is used to select investments because of limited capital by their:

• A) excess profit to achieve the highest payoff.
• B) reward per dollar cost to achieve the highest incremental NPV.
• C) incremental IRR to maximize the total rate of return.
• D) capital usage rate to stay within budget.

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Definitions:

Conversion Costs

The costs incurred to convert raw materials into finished goods, typically including labor and overhead.

Direct Materials

Direct materials are raw materials that can be directly attributable to the production process of a product and are a critical component of manufacturing costs.

FIFO Process Cost Method

An accounting method that assigns costs to inventory on the basis of the first-in, first-out principle, particularly useful in manufacturing.

Work in Process

Inventory that includes the materials, labor, and overhead costs for products that are in the production process but not yet completed.