CA Foundation · Business Economics · Nature and Scope of Business Economics
Mehta Printers is offered a one-time order of 2,000 brochures at ₹14 each. The full cost per brochure is ₹16, made up of ₹11 variable cost and ₹5 fixed cost. The firm has idle capacity, and accepting the order will not change fixed costs. By the incremental principle, what is the effect of accepting the order on the firm's profit?
Accepting the order increases profit by ₹6,000. Incremental revenue is ₹28,000 and incremental cost is only the variable cost of ₹22,000, because fixed costs do not change. Comparing price with full cost would wrongly suggest a loss.
- ALoss of ₹4,000
- BLoss of ₹2,000
- CGain of ₹6,000Correct
- DGain of ₹8,000
Explanation
Incremental revenue = 2,000 × 14 = ₹28,000. Incremental cost = 2,000 × 11 = ₹22,000, since fixed cost does not change. Incremental profit = ₹6,000, so accept. Using full cost of ₹16 would wrongly show a loss of ₹4,000 (2,000 × 2).
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