CAF-6 · Chapter 1 · Question 7 of 15
Epsilon Ltd has a non-cancellable contract to purchase 500 units of raw material per month for the next 10 months at Rs. 1,000 per unit. Due to a change in the production process, these materials are no longer needed and cannot be resold. What is the provision for this onerous contract?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Rs. 5,000,000
Explanation
An onerous contract is one where the unavoidable costs of meeting the obligations exceed the economic benefits. The provision is the total cost: 10 months x 500 units x Rs. 1,000 = Rs. 5,000,000.
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