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CMA Intermediate · Management Accounting · Marginal Costing (Management Accounting)

Kaveri Auto makes a component at a variable cost of Rs 120 per unit and has spare capacity. A buyer offers to take 2,000 units at Rs 150 per unit. Regular price is Rs 200 and full cost is Rs 170. Fixed costs will not change. By how much will profit change if the special order is accepted?

Profit rises by Rs 60,000. With spare capacity and unchanged fixed costs, only the incremental contribution matters: Rs 30 per unit (150 less 120) on 2,000 units. Full cost is irrelevant to this decision, so the apparent loss against Rs 170 is misleading.

  1. AProfit falls by Rs 40,000
  2. BProfit rises by Rs 60,000Correct
  3. CProfit rises by Rs 1,00,000
  4. DProfit falls by Rs 20,000

Explanation

Incremental contribution = (150 - 120) x 2,000 = Rs 60,000. Fixed costs are unchanged, so profit rises by Rs 60,000. Comparing with full cost of Rs 170 would wrongly show a loss of Rs 40,000.

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