Skip to content

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

Kaveri Chemicals produces 10,000 litres of a joint product X at a joint cost of Rs 3,00,000. X can be sold at split-off for Rs 40 per litre. If processed further at an additional cost of Rs 6 per litre, it sells for Rs 45 per litre. What is the effect of processing further on total profit?

Processing further reduces profit by Rs 10,000. The extra revenue is Rs 5 per litre (45 minus 40) while the extra processing cost is Rs 6 per litre, a loss of Re 1 per litre on 10,000 litres. The joint cost is common to both options and is ignored.

  1. AProfit increases by Rs 50,000
  2. BProfit decreases by Rs 10,000Correct
  3. CProfit decreases by Rs 1,00,000
  4. DProfit increases by Rs 10,000

Explanation

Incremental revenue per litre = 45 - 40 = Rs 5. Incremental cost = Rs 6. Net loss = Rs 1 per litre x 10,000 = Rs 10,000. Joint cost of Rs 3,00,000 is sunk and irrelevant. Rs 50,000 wrongly ignores the additional cost.

Did you get it right without looking?

One question tells you little. A timed set on Applications of Marginal Costing in Short Term Decision Making shows your real accuracy, how long you take and where you lose marks.

Practise Applications of Marginal Costing in Short Term Decision MakingFree diagnostic mock

More Applications of Marginal Costing in Short Term Decision Making questions