CMA Final · Strategic Cost Management · Relevant Cost Analysis
Kaveri Foods sells a product at Rs 50 per unit with variable cost Rs 30. A special order for 2,000 units at Rs 38 per unit arrives. Accepting it needs a one-time special packaging tool costing Rs 8,000 (usable only for this order) and will not affect regular sales; spare capacity exists. What is the incremental profit from accepting the order?
Incremental profit is Rs 8,000. The order gives contribution of Rs 8 per unit on 2,000 units, which is Rs 16,000, and the order-specific tooling cost of Rs 8,000 is a relevant additional cost that must be deducted.
- ARs 16,000
- BRs 8,000Correct
- CRs 24,000
- DRs 12,000
Explanation
Incremental contribution = (38 - 30) x 2,000 = Rs 16,000. Subtract the avoidable tooling cost of Rs 8,000, giving Rs 8,000. Rs 16,000 ignores the tool cost.
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