Skip to content

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

Sharma Tools Ltd has spare capacity. Variable cost per unit is Rs 60 and fixed cost absorbed per unit is Rs 25 (fixed costs will not change). A one-time special order for 2,000 units is offered at Rs 70 per unit. The effect on profit of accepting the order is:

Accepting the order raises profit by Rs 20,000. With idle capacity and unchanged fixed costs, only variable cost is relevant, so contribution is Rs 70 minus Rs 60, or Rs 10 per unit, multiplied by 2,000 units.

  1. AIncrease of Rs 20,000Correct
  2. BDecrease of Rs 30,000
  3. CIncrease of Rs 90,000
  4. DIncrease of Rs 10,000

Explanation

Contribution per unit = 70 - 60 = Rs 10. For 2,000 units, incremental profit = 2,000 x 10 = Rs 20,000. The option showing a decrease uses full cost of Rs 85 (70-85 = -15; x2,000 = -30,000), wrongly including the fixed cost that does not change.

Did you get it right without looking?

One question tells you little. A timed set on Applications of Marginal Costing in Short Term Decision Making shows your real accuracy, how long you take and where you lose marks.

Practise Applications of Marginal Costing in Short Term Decision MakingFree diagnostic mock

More Applications of Marginal Costing in Short Term Decision Making questions