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CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Ananya Chemicals processes a joint product into X at the split-off point, where X can be sold for Rs 40 per litre. Further processing costs Rs 12 per litre and the final product sells for Rs 50 per litre. Joint cost allocated to X is Rs 25 per litre. For 10,000 litres, what is the effect of processing further rather than selling at split-off?

Further processing causes a loss of Rs 20,000. The extra revenue is Rs 10 per litre, from Rs 40 to Rs 50, while the extra processing cost is Rs 12. The net loss of Rs 2 per litre on 10,000 litres is Rs 20,000. The allocated joint cost is irrelevant.

  1. ALoss of Rs 20,000Correct
  2. BGain of Rs 1,00,000
  3. CLoss of Rs 2,00,000
  4. DGain of Rs 20,000

Explanation

Incremental revenue = 50 - 40 = Rs 10 per litre; incremental cost = Rs 12. Net = -Rs 2 per litre x 10,000 = Rs 20,000 loss. The joint cost is common to both options and is ignored.

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