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

Anita Engineering uses a machine whose book value is Rs 4,00,000 and original cost was Rs 9,00,000. The machine can be sold today for Rs 2,50,000. Using it for a special order would need Rs 1,20,000 of additional running cost and the machine's resale value would fall to Rs 1,50,000 after the order. The order brings revenue of Rs 3,10,000. What is the relevant profit (benefit) of accepting the order?

The relevant profit is Rs 90,000. Revenue of Rs 3,10,000 is set against the running cost of Rs 1,20,000 and the loss in resale value of Rs 1,00,000. Book value and original cost are sunk costs and are ignored in this decision.

  1. ARs 40,000 loss
  2. BRs 10,000 profitCorrect
  3. CRs 90,000 profit
  4. DRs 60,000 profit

Explanation

Book value and original cost are sunk and ignored. Relevant cost items: running cost Rs 1,20,000 plus fall in resale value (2,50,000 - 1,50,000) Rs 1,00,000 = Rs 2,20,000. Relevant profit = 3,10,000 - 2,20,000 = Rs 90,000. The option of Rs 10,000 profit arises if... let us recheck: Rs 90,000 is the correct result, so the correct choice is Rs 90,000.

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