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CMA Final · Strategic Cost Management · Relevant Cost Analysis

Nirmal Foods Ltd has a spare capacity of 5,000 units. A customer offers to buy 5,000 units at Rs 48 each. Variable cost is Rs 38 per unit, including Rs 4 of packing that the customer will do itself. Fixed costs are unchanged, but a special licence costing Rs 20,000 is needed for the order. What is the incremental profit from accepting the order?

The incremental profit is Rs 50,000. Packing of Rs 4 is avoided, so relevant variable cost is Rs 34 and contribution is Rs 14 per unit, or Rs 70,000 on 5,000 units. Deducting the Rs 20,000 licence, which is a specific incremental cost, gives Rs 50,000.

  1. ARs 30,000
  2. BRs 50,000
  3. CRs 70,000Correct
  4. DRs 1,00,000

Explanation

Relevant variable cost per unit = 38 - 4 = Rs 34. Contribution per unit = 48 - 34 = Rs 14; for 5,000 units = Rs 70,000. Less licence Rs 20,000 gives Rs 50,000. Correct option is therefore Rs 50,000, not the figure ignoring the licence.

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