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CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

Meera Foods Ltd. has fixed costs of Rs 3,00,000 per quarter and a variable cost of Rs 40 per unit. At 10,000 units of output, the average cost per unit is Rs 70. At 12,500 units, with the same fixed cost and variable cost per unit, the average cost per unit will be:

The average cost per unit at 12,500 units will be Rs 64. Variable cost stays Rs 40 per unit, while fixed cost per unit falls to Rs 24 (Rs 3,00,000 divided by 12,500). Average cost does not stay constant because fixed cost is spread over more units.

  1. ARs 64Correct
  2. BRs 70
  3. CRs 52
  4. DRs 60

Explanation

Fixed cost per unit at 10,000 units is 3,00,000/10,000 = Rs 30, so average cost = 40 + 30 = Rs 70, consistent. At 12,500 units fixed cost per unit = 3,00,000/12,500 = Rs 24, so average cost = 40 + 24 = Rs 64. Rs 70 wrongly assumes average cost stays constant.

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