CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting
Ramesh Textiles produces cloth. Its monthly cost data at 10,000 metres output is: variable cost Rs 40 per metre and total fixed cost Rs 2,00,000. The firm now produces 16,000 metres, with fixed cost unchanged within the relevant range. What is the total cost per metre at 16,000 metres?
The total cost per metre is Rs 52.50. Total cost at 16,000 metres is variable cost of Rs 6,40,000 plus fixed cost of Rs 2,00,000, giving Rs 8,40,000. Dividing by 16,000 metres gives Rs 52.50 because fixed cost per unit falls as output rises.
- ARs 60.00
- BRs 52.50Correct
- CRs 40.00
- DRs 55.00
Explanation
Total cost = 16,000 x 40 + 2,00,000 = 6,40,000 + 2,00,000 = Rs 8,40,000. Per metre = 8,40,000 / 16,000 = Rs 52.50. Rs 60 is the per-metre cost at 10,000 metres, which wrongly treats the average cost as unchanged with volume, since fixed cost per unit falls.
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