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

Bharat Tools Ltd has fixed cost of Rs 4,00,000 per month and variable cost of Rs 60 per unit. At 8,000 units output, what is the average cost per unit?

Total cost is fixed Rs 4,00,000 plus variable Rs 4,80,000, which equals Rs 8,80,000. Dividing by 8,000 units gives an average cost of Rs 110 per unit. Rs 60 wrongly ignores fixed cost spread over the units.

  1. ARs 110Correct
  2. BRs 60
  3. CRs 50
  4. DRs 120

Explanation

Total cost = 4,00,000 + 60 x 8,000 = 4,00,000 + 4,80,000 = Rs 8,80,000. Average cost = 8,80,000 / 8,000 = Rs 110. Rs 60 ignores fixed cost per unit; Rs 50 is only the fixed cost per unit (4,00,000/8,000).

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