CAIIB Paper 3 Module B Quiz 5

Relevant costs are future costs that change depending on the option selected. Sunk costs and costs that remain unchanged across alternatives are normally irrelevant to the decision.

If ₹30 fixed overhead is unavoidable, the relevant make cost is ₹120 − ₹30 = ₹90. Since ₹90 is below the supplier price of ₹105, making is cheaper, assuming no opportunity cost or other strategic considerations.

With spare capacity, a special order can increase profit if incremental revenue exceeds incremental costs and there are no material adverse effects, such as cannibalisation, customer reaction or extra capacity requirements.

A unit may be worth continuing if its contribution exceeds the avoidable costs of keeping it open. Unavoidable fixed costs remain after closure and should not be treated as savings.

Contribution equals sales minus variable costs: ₹8 lakh − ₹5 lakh = ₹3 lakh. It covers fixed costs first; the balance is operating profit.

Required units = (fixed costs + target profit) ÷ contribution per unit = ₹6,00,000 ÷ ₹30 = 20,000 units. Therefore the correct answer should be 20,000 units.

Margin of safety = actual sales − break-even sales = ₹40 lakh − ₹28 lakh = ₹12 lakh. It measures how far sales can fall before the business reaches break-even.

The weighted average contribution depends on the proportion of each product sold. A shift toward lower-contribution products can increase the total sales needed to break even.

ABC identifies activities, accumulates costs into activity pools and assigns them using drivers that reflect resource consumption, such as setups, purchase orders or inspections.

A cost driver should reflect the activity that causes a cost. If setup effort drives setup costs, the number of setups is a logical driver.

CVP models commonly assume stable unit variable cost and total fixed cost within a relevant range. Capacity additions, overtime or economies of scale may change those relationships outside that band.

Break-even sales = fixed costs ÷ contribution margin ratio = ₹9 lakh ÷ 0.30 = ₹30 lakh.

CVP analysis relies on simplifying assumptions such as linear revenue and cost relationships within the relevant range and a constant sales mix for multi-product analysis.

Financial value is important but not the only decision criterion. Legal obligations, safety, reputation, stakeholder effects and ethical responsibilities must also be considered.

If accepting the order displaces a profitable alternative, the lost contribution is an opportunity cost and should be included in the decision.

A cost that will actually disappear upon discontinuation is avoidable and relevant. Allocated or sunk costs that remain do not represent savings from closure.

Under a binding resource constraint, rank products by contribution per unit of the limiting factor, provided demand and other constraints are considered. This maximises contribution from the scarce resource.

A: ₹60 ÷ 3 = ₹20 per hour. B: ₹50 ÷ 2 = ₹25 per hour. Product B contributes more per unit of the constrained machine-hour.

Cost-plus pricing adds a markup to measured cost but may ignore willingness to pay, competitor prices, demand elasticity and perceived value. It does not guarantee sales or optimal profitability.

Supplier quality, reliability, confidentiality, strategic capability, labour implications and resilience can materially affect a make-or-buy decision beyond the short-term cost comparison.