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CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

Ananya Pharma Ltd. is deciding whether to accept a special order. It has already spent Rs 3,00,000 on a machine now installed, which can be used only for this order. The order needs materials costing Rs 5,00,000 (purchase to be made, alternative use nil), labour of Rs 2,00,000 for idle workers who would be paid anyway, and Rs 1,50,000 of new supervision cost. The order price is Rs 9,00,000. What is the incremental profit from accepting the order?

Incremental profit is Rs 2,50,000. Only relevant costs count: materials of Rs 5,00,000 and new supervision of Rs 1,50,000, a total of Rs 6,50,000. The sunk machine cost and idle labour paid regardless are excluded. Revenue of Rs 9,00,000 minus Rs 6,50,000 leaves Rs 2,50,000.

  1. ARs 2,50,000Correct
  2. BRs 50,000
  3. CRs 1,00,000
  4. DRs 3,50,000

Explanation

Machine cost is sunk and idle labour is paid anyway, so both are irrelevant. Relevant costs are materials Rs 5,00,000 + supervision Rs 1,50,000 = Rs 6,50,000. Incremental profit = 9,00,000 - 6,50,000 = Rs 2,50,000. Rs 50,000 wrongly deducts the idle labour as well (Rs 8,50,000 cost), and Rs 1,00,000 deducts the sunk cost only in place of labour.

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