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CMA Foundation · Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions

Sharma Industries has spare capacity and receives a one-time special order for 1,000 units at ₹70 per unit. Direct material is ₹30, direct labour ₹15, variable overhead ₹10 and fixed overhead absorbed ₹20 per unit. Regular sales are unaffected. By how much will profit change if the order is accepted?

Profit rises by ₹15,000. The relevant cost is only the variable cost of ₹55 per unit, so each unit contributes ₹15 against the ₹70 price. Fixed overhead is already incurred and unchanged, so rejecting the order because of a full-cost loss would be wrong.

  1. AIncrease by ₹15,000Correct
  2. BDecrease by ₹5,000
  3. CIncrease by ₹5,000
  4. DIncrease by ₹25,000

Explanation

Variable cost per unit = 30 + 15 + 10 = ₹55. Contribution per unit = 70 - 55 = ₹15, so total = 1,000 x 15 = ₹15,000. Using full cost of ₹75 would show a loss of ₹5,000, but fixed overhead is not incremental.

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