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CMA Final · Strategic Cost Management · Pricing Decisions and Strategies

Gujarat Polymers has spare capacity and receives a one-off special order for 2,000 units at Rs 90 each. Variable cost is Rs 70 per unit, fixed cost absorbed is Rs 30 per unit, and the order needs a special tool costing Rs 15,000 that has no other use. Regular sales are unaffected. What is the incremental profit from accepting the order?

Accepting the order adds Rs 25,000 profit. Contribution is Rs 20 per unit on 2,000 units, which is Rs 40,000, and the special tool of Rs 15,000 is an incremental cost. Absorbed fixed overheads are irrelevant because spare capacity exists.

  1. ARs 25,000Correct
  2. BRs 40,000
  3. CRs -20,000
  4. DRs 5,000

Explanation

Contribution = (90 - 70) x 2,000 = Rs 40,000. Less the avoidable tool cost of Rs 15,000 gives Rs 25,000. Rs -20,000 arises from wrongly charging absorbed fixed cost (60,000 total) and ignoring the tool; fixed cost is not incremental.

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