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CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Tara Auto has spare capacity of 5,000 hours. A special order of 2,500 units is offered at Rs 140 per unit. Variable cost is Rs 100 per unit, and each unit needs 2 hours. Normal sales would not be affected, but accepting requires a one-time inspection cost of Rs 30,000. What is the net incremental profit from accepting?

Net incremental profit is Rs 70,000. The order adds contribution of Rs 40 per unit on 2,500 units, i.e. Rs 1,00,000, and the one-time inspection cost of Rs 30,000 is an incremental cash cost; capacity is spare, so no opportunity cost arises.

  1. ARs 70,000Correct
  2. BRs 1,00,000
  3. CRs 1,30,000
  4. DRs 2,50,000

Explanation

Contribution = 2,500 x (140 - 100) = 1,00,000. Less one-time inspection cost 30,000 = Rs 70,000. Rs 1,00,000 omits the incremental inspection cost. Capacity needed is 5,000 hours, which is available.

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