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

Rao Components Ltd has idle capacity. Variable cost per unit is Rs 48. Fixed costs are Rs 5,00,000 for the year and will not change. A buyer offers to take 5,000 units for a single contract. The minimum price per unit at which the company would be indifferent to accepting is:

The minimum acceptable price is Rs 48 per unit. Because capacity is idle and fixed costs stay the same whether or not the order is accepted, only the variable cost is relevant, and a price equal to it leaves total profit unchanged.

  1. ARs 48Correct
  2. BRs 148
  3. CRs 100
  4. DRs 52

Explanation

With idle capacity and fixed costs unaffected by the order, the only incremental cost is variable cost of Rs 48 per unit. At this price, contribution is zero and profit is unchanged. Adding fixed cost per unit (Rs 100) is wrong since it is not incremental.

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