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CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Mehta Auto can sell a part as it stands for Rs 60 per unit, or process it further at an additional cost of Rs 25 per unit (joint cost already incurred is Rs 40 per unit) and sell it for Rs 90. For 10,000 units, what is the incremental benefit of further processing?

Further processing adds Rs 50,000. Extra revenue is Rs 30 per unit, extra processing cost is Rs 25, leaving Rs 5 per unit, so Rs 50,000 on 10,000 units. The joint cost is already incurred and irrelevant.

  1. ARs 50,000Correct
  2. BRs 3,00,000
  3. CRs 1,50,000
  4. DRs 5,00,000

Explanation

Incremental revenue = 90 - 60 = Rs 30 per unit. Incremental cost = Rs 25 per unit. Net gain = Rs 5 per unit, or Rs 50,000 for 10,000 units. The joint cost of Rs 40 is sunk and ignored.

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