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

Lakshmi Foods operates at 70% of capacity, producing 7,000 units. Selling price is Rs 100, variable cost Rs 60, and fixed costs Rs 2,00,000. An export buyer offers to take 2,000 units at Rs 70 per unit, with extra packing cost of Rs 5 per unit and no effect on the domestic market. What is the change in profit if the order is accepted?

Profit rises by Rs 10,000. The export price of Rs 70 less variable cost of Rs 60 and packing of Rs 5 leaves Rs 5 per unit, or Rs 10,000 on 2,000 units. Fixed costs are unaffected because spare capacity exists.

  1. ARs 10,000 increaseCorrect
  2. BRs 20,000 decrease
  3. CRs 40,000 increase
  4. DRs 60,000 increase

Explanation

Relevant contribution per unit = 70 - 60 - 5 = Rs 5. For 2,000 units = Rs 10,000 increase. Fixed costs are unchanged since capacity is spare (7,000 + 2,000 = 9,000 is within 10,000 capacity). Rs 40,000 ignores packing cost.

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