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CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Rohan Ltd makes 10,000 units yearly of an intermediate that can be sold at Rs 60 after Rs 40 variable cost per unit, or processed further at an extra variable cost of Rs 12 per unit plus additional fixed cost of Rs 25,000 for the process, and sold at Rs 78. Further processing yields 5% wastage of units processed (sale on 9,500 units). What is the incremental profit or loss from further processing?

Further processing gives an incremental loss of Rs 4,000. Extra revenue is Rs 1,41,000 (7,41,000 less 6,00,000) while extra costs are Rs 1,45,000 (variable Rs 1,20,000 plus fixed Rs 25,000). Wastage reduces saleable units to 9,500.

  1. AGain of Rs 1,000
  2. BLoss of Rs 4,000Correct
  3. CLoss of Rs 24,000
  4. DGain of Rs 21,000

Explanation

Selling as is: 10,000 x 60 = 6,00,000. Further processing revenue = 9,500 x 78 = 7,41,000. Extra cost = 10,000 x 12 = 1,20,000 plus 25,000 = 1,45,000. Incremental = 7,41,000 - 6,00,000 - 1,45,000 = Rs -4,000, a loss. Ignoring wastage gives Rs 10,000 x 78 = 7,80,000, a gain of 35,000.

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