CMA Final · Strategic Cost Management · Relevant Cost Analysis
Meera Industries produces a joint product that is sold at the split-off point for Rs 40 per kg. It can be processed further at an additional cost of Rs 12 per kg, after which it sells for Rs 50 per kg. Joint costs up to split-off are Rs 28 per kg. What is the effect per kg of processing further?
Processing further causes a loss of Rs 2 per kg. Joint costs are common to both options and irrelevant, so compare incremental revenue of Rs 10 (50 minus 40) with additional processing cost of Rs 12. Since cost exceeds the extra revenue, the product should be sold at split-off.
- ALoss of Rs 2Correct
- BGain of Rs 10
- CGain of Rs 22
- DLoss of Rs 30
Explanation
Joint cost is sunk at the decision point and ignored. Incremental revenue = 50 - 40 = Rs 10; incremental cost = Rs 12. Net effect = Rs 2 loss per kg.
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