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CMA Intermediate · Management Accounting · Applications of Marginal Costing in Short Term Decision Making

Menon Cycles makes 4,000 units of a part at variable cost Rs 90 per unit. The supplier price is Rs 100. Making also needs a machine whose limited hours could earn Rs 1,00,000 contribution elsewhere if the part is bought. Ignoring other costs, what is the net benefit of buying?

Buying gives a net benefit of Rs 60,000. Buying costs Rs 10 more per unit, or Rs 40,000 on 4,000 units, but frees the machine to earn Rs 1,00,000 contribution. The difference of Rs 60,000 is the advantage.

  1. ARs 60,000 benefitCorrect
  2. BRs 40,000 loss
  3. CRs 1,40,000 benefit
  4. DRs 1,00,000 benefit

Explanation

Extra purchase cost = 4,000 x (100-90) = Rs 40,000. Contribution gained from the freed machine = Rs 1,00,000. Net benefit of buying = 1,00,000 - 40,000 = Rs 60,000.

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