Skip to content

CMA Final · Strategic Cost Management · Relevant Cost Analysis

Mahesh Engineering has spare capacity of 2,000 machine hours. A special order needs 1,500 machine hours. The variable cost is Rs 90 per hour. Fixed overhead is absorbed at Rs 60 per hour, but total fixed cost will not change. The order materials cost Rs 1,20,000 and the customer offers Rs 3,00,000. What is the incremental profit from accepting the order?

Incremental profit is Rs 45,000. Absorbed fixed overhead is irrelevant because total fixed cost does not change. Relevant costs are materials of Rs 1,20,000 and variable machine cost of 1,500 x 90 = Rs 1,35,000, giving Rs 2,55,000 against revenue of Rs 3,00,000.

  1. ARs 45,000Correct
  2. BRs 90,000
  3. CRs 1,80,000
  4. DRs 1,35,000

Explanation

Relevant costs are materials Rs 1,20,000 plus variable cost 1,500 x 90 = Rs 1,35,000, total Rs 2,55,000. Profit is 3,00,000 - 2,55,000 = Rs 45,000. Rs 90,000 wrongly deducts absorbed fixed overhead (1,500 x 60) as well and ignores the variable cost properly.

Did you get it right without looking?

One question tells you little. A timed set on Relevant Cost Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Relevant Cost AnalysisFree diagnostic mock

More Relevant Cost Analysis questions