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CMA Intermediate · Cost Accounting · Marginal Costing

Verma Ltd buys a component at Rs 45 per unit from outside. Making it in-house needs 10,000 units a year at variable cost of Rs 38 per unit, and fixed costs of Rs 2,00,000 specific to the making activity (avoidable if bought). Which decision is financially better and by how much per year?

Buying is better, saving Rs 1,30,000 per year. Making costs Rs 5,80,000 including the avoidable fixed cost of Rs 2,00,000 plus variable cost of Rs 3,80,000, while buying costs Rs 4,50,000. Avoidable fixed costs are relevant to the decision.

  1. ABuy; saves Rs 1,30,000Correct
  2. BMake; saves Rs 1,30,000
  3. CMake; saves Rs 70,000
  4. DBuy; saves Rs 70,000

Explanation

Cost to make = 10,000 x 38 + 2,00,000 = Rs 5,80,000 (the fixed cost is avoidable, so relevant). Cost to buy = 10,000 x 45 = Rs 4,50,000. Buying saves Rs 1,30,000. Option C ignores the avoidable fixed cost and wrongly picks making (saving 70,000).

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