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Discussion

For those alternatives, P's own ratio is 1.40 and Q's is 1.27. The correct conclusion is

  • A.the increment breaks even, so either may be chosen
  • B.P is preferred, having the higher ratio
  • C.Q is preferred, having the greater total benefit
  • D.both should be rejected, Q's ratio being lower than P's

Answer: A

Individual ratios cannot decide between mutually exclusive alternatives because they ignore scale. Here the increment's ratio is exactly unity, so the extra half million is neither worth spending nor worth withholding.

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