Skip to content

CA Foundation · Business Economics · Nature and Scope of Business Economics

Gupta Packaging Ltd., Kanpur, has a total cost of ₹5,00,000 for producing 10,000 boxes. A new buyer offers to take an additional 2,000 boxes at ₹40 each. Producing the extra boxes adds ₹64,000 to total cost. By the incremental principle, what is the effect on profit if the order is accepted?

Profit rises by ₹16,000. Incremental revenue is 2,000 × ₹40 = ₹80,000, while incremental cost is ₹64,000. The difference is positive, so the order adds to profit. Average cost of existing output is irrelevant to this decision.

  1. AProfit rises by ₹16,000Correct
  2. BProfit falls by ₹16,000
  3. CProfit falls by ₹10,000 since average cost is ₹50
  4. DProfit rises by ₹80,000

Explanation

Incremental revenue = 2,000 × ₹40 = ₹80,000. Incremental cost = ₹64,000. Incremental profit = ₹16,000, so the order should be accepted. The option showing a fall uses the average cost of ₹50 (a wrong base) instead of the incremental cost, which is ₹32 per box.

Did you get it right without looking?

One question tells you little. A timed set on Nature and Scope of Business Economics shows your real accuracy, how long you take and where you lose marks.

Practise Nature and Scope of Business EconomicsFree diagnostic mock

More Nature and Scope of Business Economics questions