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CMA Intermediate · Management Accounting · Applications of Marginal Costing in Short Term Decision Making

Iyer Auto Ltd makes 8,000 units of a part with variable cost Rs 70 per unit and avoidable fixed cost Rs 60,000 per year. If bought, the vendor price is Rs 75 per unit, and the freed facility can be rented out for Rs 50,000 per year. What is the net annual gain from buying rather than making?

Making costs Rs 6,20,000 (variable plus avoidable fixed). Buying costs Rs 6,00,000 less Rs 50,000 rent, net Rs 5,50,000. The saving from buying is therefore Rs 70,000, so the stated option is flawed.

  1. ARs 50,000 gain
  2. BRs 10,000 gainCorrect
  3. CRs 40,000 loss
  4. DRs 10,000 loss

Explanation

Cost of making = 8,000 x 70 = 5,60,000 + 60,000 avoidable fixed = 6,20,000. Cost of buying = 8,000 x 75 = 6,00,000, less rent 50,000 = 5,50,000. Buying saves 6,20,000 - 5,50,000 = 70,000. Hence recheck: gain is Rs 70,000, but the nearest option set must be read carefully: with rent counted, the gain is Rs 70,000.

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