Skip to content

CMA Final · Strategic Cost Management · Relevant Cost Analysis

Anand Foods has spare capacity and receives a one-time order for 2,000 units at Rs 95 per unit. Variable cost is Rs 60 per unit. Accepting requires a one-off special tool costing Rs 30,000, which has no residual value. Fixed overhead absorbed is Rs 20 per unit, but total fixed cost will not change. What is the incremental profit from accepting the order?

The incremental profit is Rs 40,000. Contribution on the order is Rs 35 per unit on 2,000 units, which is Rs 70,000, and the special tool of Rs 30,000 is an extra cost caused by the order. Absorbed fixed overhead is unaffected and is therefore ignored.

  1. ARs 40,000Correct
  2. BRs 1,00,000
  3. CRs 70,000
  4. DRs 30,000

Explanation

Contribution = (95 - 60) x 2,000 = Rs 70,000. Deduct the specific tool cost of Rs 30,000 as it is incremental, giving Rs 40,000. Absorbed fixed overhead is irrelevant, so Rs 1,00,000 wrongly uses it differently, and Rs 70,000 ignores the tool.

Did you get it right without looking?

One question tells you little. A timed set on Relevant Cost Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Relevant Cost AnalysisFree diagnostic mock

More Relevant Cost Analysis questions