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CMA Final · Strategic Cost Management · Pricing Decisions and Strategies

Gomti Engineering has spare capacity of 5,000 machine hours. A special order of 4,000 units is offered at ₹90 per unit. Variable cost is ₹70 per unit, regular fixed overhead absorbed is ₹20 per unit, and accepting the order needs a one-time special tooling cost of ₹30,000. Regular sales are unaffected. What is the incremental profit from accepting the order?</br>

Accepting adds contribution of ₹20 per unit on 4,000 units, which is ₹80,000, and incurs ₹30,000 of tooling that arises only because of the order. Incremental profit is therefore ₹50,000. Absorbed fixed overhead is irrelevant.

  1. A₹50,000Correct
  2. B₹80,000
  3. C₹1,10,000
  4. D₹(30,000)

Explanation

Incremental contribution = (90 - 70) x 4,000 = ₹80,000. Less the specific tooling cost ₹30,000 gives ₹50,000. Absorbed fixed overhead is not relevant as it is unchanged. ₹80,000 ignores tooling; a negative figure wrongly deducts absorbed fixed cost.

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