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CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Himalaya Foods Ltd. is deciding whether to process a joint product further. At split-off it sells 5,000 kg at Rs 40 per kg. Further processing costs Rs 6 per kg and the final selling price is Rs 49 per kg. Joint costs allocated to the product are Rs 1,20,000. What is the effect on profit of processing further?

Processing further increases profit by Rs 15,000. Extra revenue is Rs 9 per kg and extra cost is Rs 6 per kg, giving Rs 3 per kg on 5,000 kg. The allocated joint cost is sunk and common to both choices, so it is ignored.

  1. AIncrease of Rs 15,000Correct
  2. BDecrease of Rs 75,000
  3. CIncrease of Rs 45,000
  4. DDecrease of Rs 15,000

Explanation

Incremental revenue = (49-40) x 5,000 = Rs 45,000. Incremental cost = 6 x 5,000 = Rs 30,000. Net gain = Rs 15,000. Joint cost is a sunk cost and irrelevant.

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