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

Iyer Metals Ltd has a single scarce machine with 6,000 hours available. A regular product uses 2 hours per unit, sells at Rs 200 and has variable cost Rs 120. A special order for 1,000 units needs 2 hours per unit and all regular demand would otherwise use the full 6,000 hours. Variable cost of the special order is Rs 120 per unit. The minimum price per unit for the special order, so that profit is not reduced, is:

The minimum price is Rs 200 per unit. When capacity is fully used, each special unit displaces a regular unit using the same machine time, so the relevant cost is the Rs 120 variable cost plus Rs 80 lost contribution.

  1. ARs 200Correct
  2. BRs 120
  3. CRs 160
  4. DRs 240

Explanation

Each unit of special order displaces one regular unit (same 2 hours), losing contribution of 200-120 = Rs 80. Minimum price = variable cost 120 + opportunity cost 80 = Rs 200. Rs 120 ignores opportunity cost.

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