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CMA Final · Strategic Cost Management · Relevant Cost Analysis

Dhruv Auto has spare machine capacity and receives a one-time order for 5,000 units at Rs 85 per unit. Variable cost is Rs 60 per unit. The order needs a special tool costing Rs 50,000, which has no other use. Normal sales are unaffected, and fixed overhead of Rs 20 per unit is already absorbed in regular pricing. What is the incremental profit from accepting the order?

Accepting the order adds Rs 75,000 to profit. Contribution is Rs 25 per unit on 5,000 units, or Rs 1,25,000, and the order-specific tool cost of Rs 50,000 is deducted. Absorbed fixed overhead is not an incremental cost and should be disregarded.

  1. ARs 25,000
  2. BRs 75,000Correct
  3. CRs 1,25,000
  4. DRs 2,25,000

Explanation

Incremental contribution = (85 - 60) x 5,000 = Rs 1,25,000. The tool cost of Rs 50,000 is specific to the order and therefore relevant. Incremental profit = 1,25,000 - 50,000 = Rs 75,000. Absorbed fixed overhead is not incremental and is ignored.

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