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CMA Final · Strategic Cost Management · Pricing Decisions and Strategies

Nilgiri Tea Co. is offered a one-time special order for 5,000 units at Rs 90 per unit. Variable cost is Rs 70 per unit, and normal full cost is Rs 100 per unit including Rs 20 fixed overhead. The firm has spare capacity and the order does not affect regular sales. Incremental fixed costs for the order are Rs 30,000. What is the effect on profit of accepting the order?

Accepting the order increases profit by Rs 70,000. Contribution is Rs 20 per unit on 5,000 units, giving Rs 1,00,000, less Rs 30,000 of incremental fixed costs. Comparing the price with full cost would wrongly show a loss, because absorbed fixed overhead is not relevant.

  1. AIncrease of Rs 70,000Correct
  2. BDecrease of Rs 50,000
  3. CIncrease of Rs 1,00,000
  4. DDecrease of Rs 80,000

Explanation

Contribution per unit = 90 - 70 = Rs 20; for 5,000 units = Rs 1,00,000. Deduct incremental fixed costs Rs 30,000 = Rs 70,000 gain. The Rs 50,000 loss wrongly compares price with full cost (90-100 = -10 x 5,000). Allocated fixed overhead is not relevant.

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