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CMA Intermediate · Cost Accounting · Marginal Costing

Sharma Textiles Ltd sells a product at Rs 80 per unit. Variable cost is Rs 50 per unit and fixed costs are Rs 3,00,000 per year. A special export order for 2,000 units is offered at Rs 62 per unit. Spare capacity exists and no fixed cost will increase. What is the effect on profit if the order is accepted?

Profit increases by Rs 24,000. The special order earns a contribution of Rs 12 per unit (62 less 50 variable cost) on 2,000 units. Since spare capacity exists and fixed costs do not change, the whole contribution adds to profit.

  1. AProfit increases by Rs 24,000Correct
  2. BProfit decreases by Rs 36,000
  3. CProfit increases by Rs 1,24,000
  4. DProfit increases by Rs 60,000

Explanation

Contribution per unit on the special order = 62 - 50 = Rs 12. For 2,000 units, incremental contribution = Rs 24,000. Fixed costs are unchanged, so profit rises by Rs 24,000. Option B wrongly charges fixed cost absorption; option C uses the selling price less nothing relevant.

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