CAF-5 · Chapter 18 · Question 15 of 20
(Relevant Costing & Further Processing under Capacity Constraints) Joint Product Alpha sells for Rs. 50 at split-off or Rs. 80 as Super-Alpha (incremental processing Rs. 25, 2 machine hours). Opportunity cost of MH is Rs. 4/hr (loss of contribution). Should Alpha be processed further?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) No, because total relevant incremental cost (Rs. 33) exceeds incremental revenue (Rs. 30).
Explanation
Incremental Revenue = 80 - 50 = Rs. 30. Total Incremental Cost = VC (25) + Opp Cost (2 hrs * 4 = 8) = Rs. 33. Since cost (33) > revenue (30), the processing results in a net loss of Rs. 3 per unit.
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