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CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Sundaram Fabrics Ltd. can sell a product at a normal price of Rs 80 per unit. Variable cost is Rs 52 per unit and fixed cost absorbed is Rs 18 per unit. The firm has idle capacity and receives a one-time special order for 2,000 units at Rs 60 per unit with no additional fixed cost and no effect on regular sales. What is the incremental profit from accepting the order?

The incremental profit is Rs 16,000. With idle capacity and no added fixed cost, only variable cost matters. The order earns Rs 8 per unit (60 less 52), and on 2,000 units this gives Rs 16,000. Absorbed fixed cost is irrelevant to this decision.

  1. ARs 16,000Correct
  2. BRs 4,000
  3. CRs 12,000
  4. DRs 20,000

Explanation

With idle capacity and no extra fixed cost, only variable cost is relevant. Contribution per unit = 60 - 52 = Rs 8. For 2,000 units, incremental profit = Rs 16,000. Using full cost of Rs 70 would give Rs 10 loss per unit, which wrongly includes the absorbed fixed cost.

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