This chapter-wise practice test covers Chapter 14: Marginal Costing - Test 4 for CA Intermediate Group 2 students preparing for the January 2027 examination attempt. It carries 50 marks across 25 questions in case scenarios and standalone practical MCQs with a time limit of 60 minutes and no negative marking.
25 questions across 1 chapter, 50 marks and 60 minutes in the timed paper. Every answer below is shown with the working behind it and the authority it rests on.
Law and standards used: ICAI Study Material for CA Intermediate Paper 4: Cost and Management Accounting (relevant for 2027 attempt).
Questions
25
Marks
50
Time limit
60 minutes
Attempt
January 2027
Group
Group 2
Law basis
ICAI Study Material for CA Intermediate Paper 4: Cost and Management Accounting (relevant for 2027 attempt)
Content as of
2026-11-10
Chapters covered
Chapter 14: Marginal Costing (25 Q)
Questions, answers and explanations
Question 1 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Vikram Automotive Components Ltd. manufactures a specialised transmission component, R, used by automobile manufacturers. Due to increasing production commitments, the company is evaluating whether to continue manufacturing this component internally or purchase it from an external supplier. The company currently manufactures 6,000 units annually. Its existing manufacturing facility has sufficient capacity for this production and can be used for an alternative component if production of R is outsourced.
The following information relates to annual production:
| Particulars | Amount |
| Direct material per unit | ₹42 |
| Direct labour per unit | ₹28 |
| Variable manufacturing overhead per unit | ₹18 |
| Supplier's quotation per unit | ₹112 |
| Dedicated fixed manufacturing expenses | ₹3,00,000 |
| Fixed expenses avoidable on outsourcing | ₹1,80,000 |
| Unavoidable fixed manufacturing expenses | ₹1,20,000 |
| Common allocated factory overhead | ₹2,40,000 |
The supplier guarantees delivery of the entire annual requirement of 6,000 units at the quoted price. If production is outsourced, the factory space and machinery released can be used to manufacture another component, generating an additional annual contribution of ₹1,50,000. No additional fixed expenditure is necessary for this alternative production. The common allocated overhead will continue under either option. The book depreciation of the existing machinery is ₹90,000 and is not affected by the decision. A previously incurred product-design expenditure of ₹75,000 is also recorded in the accounts. Both amounts relate to past investments and cannot be recovered. There are no quality differences, delivery risks, contractual penalties or other non-financial differences between the two alternatives. Management wants to evaluate the relevant manufacturing cost, purchase cost and opportunity benefit before making the decision. All stated costs remain constant throughout the decision period.
What is the total variable manufacturing cost per unit of Component R?
₹88 (correct answer)
₹98
₹112
₹130
Answer: A — ₹88
Explanation. Variable manufacturing cost per unit = Direct material + Direct labour + Variable manufacturing overhead. Therefore, ₹42 + ₹28 + ₹18 = ₹88 per unit. The common allocated factory overhead, dedicated fixed expenses and historical expenditure are not variable manufacturing costs. Option b incorrectly adds an additional ₹10, while option c uses the supplier's quotation rather than the company's internal variable cost. The relevant manufacturing cost must first be separated into variable and fixed components.
Where it goes wrong. Including fixed or allocated overheads while determining variable manufacturing cost per unit.
Question 3 · 2 marks · Chapter 14: Marginal Costing · medium
Considering the contribution of ₹1,50,000 obtainable from alternative production, what is the net financial advantage of outsourcing Component R?
₹36,000
₹1,50,000
₹1,86,000 (correct answer)
₹2,22,000
Answer: C — ₹1,86,000
Explanation. Purchasing the component already saves ₹36,000 compared with internal manufacture after considering avoidable fixed expenses. In addition, outsourcing releases capacity capable of generating ₹1,50,000 alternative contribution. Total advantage = ₹36,000 + ₹1,50,000 = ₹1,86,000. The ₹1,50,000 is an opportunity benefit available only under outsourcing. Option a ignores this benefit, while option d incorrectly adds the alternative contribution twice or includes irrelevant allocated expenses.
Where it goes wrong. Ignoring the opportunity benefit of alternative use of released production capacity.
Question 4 · 2 marks · Chapter 14: Marginal Costing · hard
What is the maximum supplier quotation per unit at which purchasing Component R and using the released capacity for alternative production would remain financially indifferent to internal manufacture?
₹112
₹118
₹130
₹143 (correct answer)
Answer: D — ₹143
Explanation. Relevant cost of internal manufacture = (6,000 × ₹88) + ₹1,80,000 = ₹7,08,000. Add the alternative contribution forgone if the company manufactures internally: ₹7,08,000 + ₹1,50,000 = ₹8,58,000. Indifference purchase price per unit = ₹8,58,000 ÷ 6,000 = ₹143. A supplier quotation below ₹143 favours purchasing; above ₹143 favours internal manufacture. Option c excludes the opportunity cost of alternative capacity utilisation.
Where it goes wrong. Ignoring opportunity cost while determining the maximum acceptable outsourcing price.
Question 5 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Apex Polychem Ltd. manufactures industrial-grade packaging containers for domestic chemical manufacturers. The company operates a production facility with an annual practical capacity of 20,000 containers. Domestic customers have confirmed orders for 15,000 containers for the coming month. The management has received a special export enquiry from an overseas distributor for 4,000 containers at a substantially reduced price. The export contract is a one-time order and does not create any obligation for future periods.
Relevant operating information is as follows:
| Particulars | Amount |
| Normal domestic selling price per container | ₹180 |
| Variable manufacturing cost per container | ₹92 |
| Domestic variable selling cost per container | ₹10 |
| Special export packaging per container | ₹8 |
| Export freight per container | ₹6 |
| Offered export price per container | ₹126 |
| Additional export certification and testing | ₹24,000 |
| Existing monthly fixed manufacturing expenses | ₹4,80,000 |
Export orders do not attract the domestic selling cost of ₹10 per unit. The export packaging and freight expenses are incurred exclusively for export containers. The additional certification and testing expenditure is incurred only if the order is accepted. Domestic sales will not be affected by the export contract, and the overseas buyer has agreed not to resell the containers in the domestic market. The factory has sufficient idle capacity to manufacture all 4,000 export containers without reducing domestic production. Existing fixed manufacturing expenses will remain unchanged, irrespective of the acceptance of the order. The company has already incurred ₹1,20,000 on product development and export-market research. This expenditure is not recoverable and will not change under either alternative. Management is also evaluating a hypothetical export enquiry for 6,000 containers, which would exceed available idle capacity and require displacement of some domestic orders. Assume all orders can be completed within the relevant production period, and no additional capital investment is required.
What is the net incremental profit from accepting the 4,000-container export order at ₹126 per container?
₹56,000 (correct answer)
₹80,000
₹24,000
₹1,04,000
Answer: A — ₹56,000
Explanation. Incremental variable cost per export container = ₹92 + ₹8 + ₹6 = ₹106. Contribution per container = ₹126 − ₹106 = ₹20. Total contribution = 4,000 × ₹20 = ₹80,000. Deduct additional certification and testing of ₹24,000. Net incremental profit = ₹80,000 − ₹24,000 = ₹56,000. Existing fixed manufacturing expenses and historical research expenditure are irrelevant because they remain unchanged under both alternatives.
Where it goes wrong. Ignoring the additional fixed expenditure specifically arising from acceptance of the export order.
Question 6 · 2 marks · Chapter 14: Marginal Costing · hard
What is the minimum export selling price per container required to make the 4,000-unit special order financially acceptable without reducing existing profit?
₹106
₹112 (correct answer)
₹118
₹120
Answer: B — ₹112
Explanation. Variable export cost per container = ₹92 + ₹8 + ₹6 = ₹106. Additional certification cost per unit = ₹24,000 ÷ 4,000 = ₹6. Therefore, the minimum acceptable price = ₹106 + ₹6 = ₹112. At this price, the order exactly recovers all incremental expenditure and contributes nothing towards additional profit. Option a covers only the variable costs and ignores certification, while option c overstates the required recovery.
Where it goes wrong. Calculating the minimum price using variable cost alone and omitting order-specific fixed expenditure.
Question 7 · 2 marks · Chapter 14: Marginal Costing · medium
Suppose the overseas buyer increases the order to 6,000 containers at ₹126 each. The additional 1,000 units beyond idle capacity would displace 1,000 domestic containers. What is the resulting net incremental profit, and should the revised order be accepted?
₹56,000; accept
₹1,02,000; accept
₹18,000; accept (correct answer)
₹60,000 loss; reject
Answer: C — ₹18,000; accept
Explanation. Export contribution = 6,000 × (₹126 − ₹106) = ₹1,20,000. Certification cost = ₹24,000. Domestic contribution per container = ₹180 − ₹92 − ₹10 = ₹78. Forgone domestic contribution = 1,000 × ₹78 = ₹78,000. Net incremental profit = ₹1,20,000 − ₹24,000 − ₹78,000 = ₹18,000. Since the incremental result is positive, the revised order should be accepted.
Where it goes wrong. Ignoring the opportunity cost of domestic contribution lost when export production exceeds idle capacity.
Question 8 · 2 marks · Chapter 14: Marginal Costing · hard
Assume the original export order remains 4,000 containers, but the overseas buyer reduces the offered price to ₹108 per container. What should management decide?
Accept because the order generates ₹8,000 additional profit.
Accept because the order recovers all variable costs.
Accept because existing fixed manufacturing expenses are unchanged.
Reject because acceptance would reduce profit by ₹16,000. (correct answer)
Answer: D — Reject because acceptance would reduce profit by ₹16,000.
Explanation. Variable export cost remains ₹106 per container. Contribution at the revised price = ₹108 − ₹106 = ₹2 per container. Total contribution = 4,000 × ₹2 = ₹8,000. Additional certification and testing cost remains ₹24,000. Net incremental result = ₹8,000 − ₹24,000 = ₹16,000 loss. Therefore, rejection is financially preferable. Recovering variable costs alone is insufficient because the order also creates additional fixed expenditure.
Where it goes wrong. Accepting a special order merely because its price exceeds variable cost without checking all incremental costs.
Question 9 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. Zenith Consumer Engineering Ltd. manufactures several industrial products through separate product divisions. Management is reviewing the continuation of Product D and the temporary closure of its manufacturing facility during a period of economic slowdown. The company has received declining orders for Product D, and the finance department has prepared a product-wise contribution statement to evaluate the discontinuance proposal.
Product D's monthly operating information is as follows:
| Particulars | Amount |
| Sales revenue | ₹24,00,000 |
| Total variable costs | ₹16,00,000 |
| Avoidable product-specific fixed expenses | ₹5,50,000 |
| Allocated common fixed expenses | ₹2,00,000 |
| One-time closure and termination expenditure | ₹50,000 |
The allocated common fixed expenses will continue even if Product D is discontinued. Product-specific fixed expenses of ₹5,50,000 can be completely eliminated on discontinuance. The closure and termination expenditure arises only if the product is discontinued.
The company is also considering temporary closure of the entire manufacturing facility. Total monthly fixed expenses while operating amount to ₹9,00,000. If operations are suspended, fixed expenses of ₹4,00,000 will continue, including security, unavoidable rent, retained supervisory staff and shutdown-preservation expenditure. The remaining fixed expenses can be avoided through temporary closure. The company's overall P/V ratio is 40%, and projected monthly sales under the slowdown are ₹14,00,000. All variable costs cease if production is temporarily suspended. No additional revenue is earned during the closure period. Management wants to distinguish the contribution required to justify continued operations from the sales required to recover all normal fixed expenses. Assume that reopening costs and non-financial considerations do not affect the numerical decisions. All calculations should be made using the relevant-cost approach prescribed for short-term managerial decisions.
What is the effect on the company's monthly profit if Product D is discontinued?
Profit decreases by ₹3,00,000. (correct answer)
Profit increases by ₹2,00,000.
Profit decreases by ₹2,00,000.
Profit increases by ₹3,00,000.
Answer: A — Profit decreases by ₹3,00,000.
Explanation. Product D generates contribution of ₹24,00,000 − ₹16,00,000 = ₹8,00,000. Discontinuance saves avoidable fixed expenses of ₹5,50,000 but creates closure expenditure of ₹50,000. Common allocated fixed expenses remain unchanged. Net impact of discontinuance = ₹5,50,000 − ₹50,000 − ₹8,00,000 = ₹3,00,000 adverse. Hence, discontinuance would reduce company profit by ₹3,00,000, and continuation is financially preferable.
Where it goes wrong. Comparing contribution only with avoidable fixed expenses while overlooking one-time closure costs.
Question 10 · 2 marks · Chapter 14: Marginal Costing · hard
What is the current reported monthly segment profit of Product D after allocating common fixed expenses? How should the ₹2,00,000 common fixed expense be treated in the discontinuance decision?
Loss of ₹50,000; the entire common cost is avoidable.
Profit of ₹50,000; the common cost is unavoidable and irrelevant to the choice. (correct answer)
Profit of ₹2,50,000; common fixed expenses must be excluded from reported segment profit.
Loss of ₹2,00,000; the common cost must be treated as an additional closure expenditure.
Answer: B — Profit of ₹50,000; the common cost is unavoidable and irrelevant to the choice.
Explanation. Reported segment profit = Contribution − Avoidable fixed expenses − Allocated common fixed expenses = ₹8,00,000 − ₹5,50,000 − ₹2,00,000 = ₹50,000. The common expense continues regardless of discontinuance, so it does not differ between the alternatives. It is included in reported segment profit but excluded from the incremental discontinuance comparison. Option c incorrectly removes common expenses from reported profit merely because they are irrelevant to the decision.
Where it goes wrong. Confusing an expense's allocation in segment reporting with its relevance to a discontinuance decision.
Question 11 · 2 marks · Chapter 14: Marginal Costing · medium
Calculate the monthly sales value at which Zenith Consumer Engineering Ltd. reaches the shutdown/continue indifference threshold and the ordinary accounting break-even point, respectively.
₹22,50,000 and ₹12,50,000
₹15,00,000 and ₹22,50,000
₹12,50,000 and ₹22,50,000 (correct answer)
₹12,50,000 and ₹18,00,000
Answer: C — ₹12,50,000 and ₹22,50,000
Explanation. Net avoidable fixed expenses = Total operating fixed expenses − Expenses continuing during closure = ₹9,00,000 − ₹4,00,000 = ₹5,00,000. Shutdown threshold sales = ₹5,00,000 ÷ 40% = ₹12,50,000. Ordinary break-even sales = ₹9,00,000 ÷ 40% = ₹22,50,000. The first threshold compares contribution with net avoidable fixed expenses; the second requires recovery of all normal fixed expenses.
Where it goes wrong. Using total fixed expenses instead of net avoidable fixed expenses to calculate the shutdown/continue threshold.
Question 12 · 2 marks · Chapter 14: Marginal Costing · hard
If projected monthly sales are ₹14,00,000, what is the financially preferable decision regarding temporary factory closure, and by how much will the preferred option reduce the company's loss?
Shut down; loss will reduce by ₹3,40,000.
Shut down; loss will reduce by ₹60,000.
Both alternatives result in identical losses.
Continue operations; loss will be lower by ₹60,000. (correct answer)
Answer: D — Continue operations; loss will be lower by ₹60,000.
Explanation. Contribution from continued operations = ₹14,00,000 × 40% = ₹5,60,000. Loss while operating = ₹9,00,000 − ₹5,60,000 = ₹3,40,000. If shut down, the company incurs unavoidable fixed expenses of ₹4,00,000. Continuing therefore reduces the loss by ₹4,00,000 − ₹3,40,000 = ₹60,000. Sales exceed the shutdown threshold of ₹12,50,000, although they remain below ordinary break-even sales.
Where it goes wrong. Assuming that a business should automatically shut down whenever actual sales are below ordinary break-even sales.
Question 13 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A company manufactures 10,000 precision components internally. The variable manufacturing cost is ₹165 per unit, and fixed expenses of ₹2,00,000 can be avoided entirely if the components are purchased externally. The supplier offers the components for ₹180 per unit. There is no alternative use of the released capacity. Which decision minimises relevant cost?
A company manufactures 10,000 precision components internally. The variable manufacturing cost is ₹165 per unit, and fixed expenses of ₹2,00,000 can be avoided entirely if the components are purchased externally. The supplier offers the components for ₹180 per unit. There is no alternative use of the released capacity. Which decision minimises relevant cost?
Answer: A — Purchase externally; advantage ₹50,000.
Explanation. Relevant cost of internal manufacture = (10,000 × ₹165) + ₹2,00,000 = ₹18,50,000. External purchase cost = 10,000 × ₹180 = ₹18,00,000. Purchasing saves ₹50,000. Fixed expenses that can be avoided must be included in the make-or-buy comparison. No opportunity benefit is available because the released capacity has no alternative use. Therefore, external purchasing is financially preferable.
Where it goes wrong. Comparing purchase price with variable manufacturing cost while excluding avoidable fixed expenses.
Question 14 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A manufacturer requires 12,000 units of a component. Variable internal manufacturing cost is ₹90 per unit, and avoidable fixed expenses are ₹1,20,000. An outside supplier quotes ₹100 per unit. If outsourcing releases capacity that can earn an additional contribution of ₹75,000, what is the net financial advantage of outsourcing?
A manufacturer requires 12,000 units of a component. Variable internal manufacturing cost is ₹90 per unit, and avoidable fixed expenses are ₹1,20,000. An outside supplier quotes ₹100 per unit. If outsourcing releases capacity that can earn an additional contribution of ₹75,000, what is the net financial advantage of outsourcing?
₹75,000 disadvantage
₹75,000 advantage (correct answer)
₹1,20,000 advantage
₹1,95,000 advantage
Answer: B — ₹75,000 advantage
Explanation. Internal relevant manufacturing cost = (12,000 × ₹90) + ₹1,20,000 = ₹12,00,000. Purchase cost = 12,000 × ₹100 = ₹12,00,000. Thus, before considering capacity utilisation, both options have equal relevant cost. Outsourcing additionally generates contribution of ₹75,000 from alternative production. Net financial advantage of outsourcing is therefore ₹75,000.
Where it goes wrong. Comparing only manufacturing and purchase costs while overlooking the opportunity contribution available through outsourcing.
Question 15 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A company requires 4,000 units of a component. Internal variable manufacturing cost is ₹70 per unit, and dedicated fixed costs of ₹40,000 can be avoided if purchased externally. An outside supplier offers ₹90 per unit. Existing tooling with a book value of ₹1,20,000 and common fixed overheads of ₹80,000 will remain unaffected under either alternative. What is the preferable decision?
A company requires 4,000 units of a component. Internal variable manufacturing cost is ₹70 per unit, and dedicated fixed costs of ₹40,000 can be avoided if purchased externally. An outside supplier offers ₹90 per unit. Existing tooling with a book value of ₹1,20,000 and common fixed overheads of ₹80,000 will remain unaffected under either alternative. What is the preferable decision?
Answer: C — Manufacture internally; saving ₹40,000.
Explanation. Internal relevant cost = (4,000 × ₹70) + ₹40,000 = ₹3,20,000. External purchase cost = 4,000 × ₹90 = ₹3,60,000. Manufacturing internally saves ₹40,000. The tooling book value is a historical cost and remains unchanged, while common fixed overhead is unavoidable. Neither affects the decision. Option d incorrectly treats the historical tooling value as a recoverable saving from purchasing.
Where it goes wrong. Including sunk historical expenditure and unaffected common fixed overhead in a future decision.
Question 16 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A manufacturer receives a special export order for 5,000 units at ₹78 per unit. Variable manufacturing cost is ₹55 per unit. Additional export packaging costs ₹3 per unit, freight costs ₹2 per unit, and buyer-specific documentation costs ₹15,000. Idle capacity is sufficient, and there is no displacement of domestic sales. What is the incremental profit from accepting the order?
A manufacturer receives a special export order for 5,000 units at ₹78 per unit. Variable manufacturing cost is ₹55 per unit. Additional export packaging costs ₹3 per unit, freight costs ₹2 per unit, and buyer-specific documentation costs ₹15,000. Idle capacity is sufficient, and there is no displacement of domestic sales. What is the incremental profit from accepting the order?
₹60,000
₹90,000
₹15,000
₹75,000 (correct answer)
Answer: D — ₹75,000
Explanation. Total incremental variable cost per unit = ₹55 + ₹3 + ₹2 = ₹60. Contribution per export unit = ₹78 − ₹60 = ₹18. Total contribution = 5,000 × ₹18 = ₹90,000. Deduct buyer-specific documentation cost of ₹15,000. Net incremental profit = ₹90,000 − ₹15,000 = ₹75,000. Existing fixed expenses are unaffected because the order uses idle capacity.
Where it goes wrong. Treating the special order price above manufacturing variable cost as sufficient without including export-specific costs.
Question 17 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A company receives an export order for 2,000 units. Variable manufacturing cost is ₹120 per unit, export freight is ₹8 per unit, and one-time certification cost is ₹12,000. Idle capacity is sufficient for only 1,500 units. The remaining 500 units will displace domestic sales, each generating a contribution of ₹40. What is the minimum export price per unit that makes the order financially acceptable?
A company receives an export order for 2,000 units. Variable manufacturing cost is ₹120 per unit, export freight is ₹8 per unit, and one-time certification cost is ₹12,000. Idle capacity is sufficient for only 1,500 units. The remaining 500 units will displace domestic sales, each generating a contribution of ₹40. What is the minimum export price per unit that makes the order financially acceptable?
₹144 (correct answer)
₹134
₹140
₹150
Answer: A — ₹144
Explanation. Incremental variable export cost = ₹120 + ₹8 = ₹128 per unit. Certification cost per order unit = ₹12,000 ÷ 2,000 = ₹6. Displacement of domestic contribution = 500 × ₹40 = ₹20,000, equivalent to ₹10 per export unit. Minimum acceptable price = ₹128 + ₹6 + ₹10 = ₹144. The opportunity cost must be included because part of the export order displaces profitable domestic sales.
Where it goes wrong. Ignoring the opportunity cost of domestic contribution lost because the order exceeds available idle capacity.
Question 18 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A company receives a special order for 3,000 export units at ₹140 each. Variable manufacturing cost is ₹115 per unit, special packaging costs ₹5 per unit, export freight costs ₹8 per unit and an export agent charges ₹4 per unit. Additional testing expenditure of ₹18,000 arises only if the order is accepted. Idle capacity is sufficient. What should management decide?
A company receives a special order for 3,000 export units at ₹140 each. Variable manufacturing cost is ₹115 per unit, special packaging costs ₹5 per unit, export freight costs ₹8 per unit and an export agent charges ₹4 per unit. Additional testing expenditure of ₹18,000 arises only if the order is accepted. Idle capacity is sufficient. What should management decide?
Reject; acceptance would reduce profit by ₹6,000.
Accept; profit would increase by ₹6,000. (correct answer)
Accept; profit would increase by ₹24,000.
Reject; acceptance would reduce profit by ₹18,000.
Answer: B — Accept; profit would increase by ₹6,000.
Explanation. Incremental variable cost per unit = ₹115 + ₹5 + ₹8 + ₹4 = ₹132. Contribution per unit = ₹140 − ₹132 = ₹8. Total contribution = 3,000 × ₹8 = ₹24,000. Deduct additional testing expenditure of ₹18,000. Net incremental profit = ₹24,000 − ₹18,000 = ₹6,000. Since idle capacity is sufficient and domestic sales are unaffected, the order should be accepted.
Where it goes wrong. Ignoring order-specific testing costs or treating the full export contribution as additional profit.
Question 19 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A product division reports monthly sales of ₹12,00,000 and variable costs of ₹7,20,000. Its fixed expenses total ₹5,60,000, of which ₹3,20,000 are avoidable on discontinuance and ₹2,40,000 are allocated common expenses that will continue. What is the effect of discontinuing the division on company profit?
A product division reports monthly sales of ₹12,00,000 and variable costs of ₹7,20,000. Its fixed expenses total ₹5,60,000, of which ₹3,20,000 are avoidable on discontinuance and ₹2,40,000 are allocated common expenses that will continue. What is the effect of discontinuing the division on company profit?
Profit increases by ₹1,60,000.
Profit increases by ₹3,20,000.
Profit decreases by ₹1,60,000. (correct answer)
Profit decreases by ₹2,40,000.
Answer: C — Profit decreases by ₹1,60,000.
Explanation. Contribution = ₹12,00,000 − ₹7,20,000 = ₹4,80,000. On discontinuance, the company saves avoidable fixed expenses of ₹3,20,000 but loses contribution of ₹4,80,000. Unavoidable allocated common expenses of ₹2,40,000 remain unchanged. Net effect = ₹3,20,000 − ₹4,80,000 = ₹1,60,000 decrease in profit. The division should therefore be continued despite its reported segment loss of ₹80,000.
Where it goes wrong. Treating total allocated fixed expenses as savings when only a portion is avoidable.
Question 20 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A product line generates monthly contribution of ₹6,50,000. Its avoidable fixed expenses are ₹5,80,000, and common allocated fixed expenses of ₹1,50,000 will continue irrespective of discontinuance. Closing the product line will additionally incur ₹20,000 of termination expenditure. By how much will company profit change if the product line is discontinued?
A product line generates monthly contribution of ₹6,50,000. Its avoidable fixed expenses are ₹5,80,000, and common allocated fixed expenses of ₹1,50,000 will continue irrespective of discontinuance. Closing the product line will additionally incur ₹20,000 of termination expenditure. By how much will company profit change if the product line is discontinued?
Profit increases by ₹70,000.
Profit decreases by ₹70,000.
Profit increases by ₹90,000.
Profit decreases by ₹90,000. (correct answer)
Answer: D — Profit decreases by ₹90,000.
Explanation. Contribution lost on discontinuance = ₹6,50,000. Avoidable fixed expenses saved = ₹5,80,000. Additional termination expenditure = ₹20,000. Net change in profit = ₹5,80,000 − ₹6,50,000 − ₹20,000 = ₹90,000 adverse. The common allocated expense of ₹1,50,000 does not change and is irrelevant to this comparison. Therefore, discontinuance reduces company profit by ₹90,000.
Where it goes wrong. Treating termination expenditure as a saving instead of an additional cost of discontinuance.
Question 21 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A manufacturing concern incurs total fixed expenses of ₹8,00,000 while operating. If the plant is temporarily closed, unavoidable fixed expenses, including preservation and security costs, will amount to ₹3,00,000. Contribution per unit is ₹50. What is the shutdown point in physical units?
A manufacturing concern incurs total fixed expenses of ₹8,00,000 while operating. If the plant is temporarily closed, unavoidable fixed expenses, including preservation and security costs, will amount to ₹3,00,000. Contribution per unit is ₹50. What is the shutdown point in physical units?
10,000 units (correct answer)
16,000 units
60,000 units
6,000 units
Answer: A — 10,000 units
Explanation. Net avoidable fixed expenses = Total operating fixed expenses − Fixed expenses incurred during shutdown = ₹8,00,000 − ₹3,00,000 = ₹5,00,000. Shutdown point in units = ₹5,00,000 ÷ ₹50 = 10,000 units. At this level, contribution exactly equals the net fixed expenses saved through continued operation. Option b incorrectly uses total operating fixed expenses without deducting the unavoidable expenses.
Where it goes wrong. Using total fixed expenses instead of the net avoidable fixed expenses in the shutdown-point calculation.
Question 22 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A factory has total fixed costs of ₹9,00,000. Fixed expenses of ₹4,00,000 will continue even if the factory is temporarily closed. Contribution is ₹50 per unit. Expected sales are 12,000 units. Which statement correctly explains the shutdown decision and ordinary break-even point?
A factory has total fixed costs of ₹9,00,000. Fixed expenses of ₹4,00,000 will continue even if the factory is temporarily closed. Contribution is ₹50 per unit. Expected sales are 12,000 units. Which statement correctly explains the shutdown decision and ordinary break-even point?
Shutdown point is 18,000 units; the company should shut down because it is below break-even.
Shutdown point is 10,000 units and ordinary break-even point is 18,000 units; the company should continue operating despite its loss. (correct answer)
Both shutdown point and ordinary break-even point are 10,000 units; the company should continue.
Shutdown point is 18,000 units and ordinary break-even point is 10,000 units; the company should close.
Answer: B — Shutdown point is 10,000 units and ordinary break-even point is 18,000 units; the company should continue operating despite its loss.
Explanation. Net avoidable fixed expenses = ₹9,00,000 − ₹4,00,000 = ₹5,00,000. Shutdown point = ₹5,00,000 ÷ ₹50 = 10,000 units. Ordinary BEP = ₹9,00,000 ÷ ₹50 = 18,000 units. At 12,000 units, contribution is ₹6,00,000 and operating loss is ₹3,00,000. Closure would cause a loss of ₹4,00,000. Continuing therefore reduces the loss by ₹1,00,000.
Where it goes wrong. Confusing the shutdown threshold with ordinary break-even and assuming every accounting loss warrants closure.
Question 23 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A factory generates sales of ₹18,00,000 and incurs variable costs of ₹12,00,000 and fixed operating expenses of ₹8,00,000. If the plant is shut down, it will incur unavoidable fixed and closure-period expenses of ₹2,50,000. Which decision minimises the company's loss?
A factory generates sales of ₹18,00,000 and incurs variable costs of ₹12,00,000 and fixed operating expenses of ₹8,00,000. If the plant is shut down, it will incur unavoidable fixed and closure-period expenses of ₹2,50,000. Which decision minimises the company's loss?
Shut down; loss will be ₹2,00,000.
Shut down; loss will be ₹2,50,000, reducing the loss by ₹50,000.
Continue operations; loss will be ₹2,00,000, reducing the loss by ₹50,000. (correct answer)
Continue operations; loss will be ₹2,50,000.
Answer: C — Continue operations; loss will be ₹2,00,000, reducing the loss by ₹50,000.
Explanation. Loss under continued operation = Total costs − Sales = (₹12,00,000 + ₹8,00,000) − ₹18,00,000 = ₹2,00,000. If the factory shuts down, variable expenses cease and unavoidable closure-period expenses of ₹2,50,000 remain. Comparing the two alternatives, continued operation produces a lower loss by ₹50,000. This is a direct comparison of future relevant financial consequences rather than reliance on the existence of an accounting loss alone.
Where it goes wrong. Assuming shutdown is preferable merely because the factory is reporting an operating loss.
Question 24 · 2 marks · Chapter 14: Marginal Costing · hard
Scenario. A business has total fixed expenses of ₹6,60,000 and a P/V ratio of 30%. If the factory is closed, unavoidable fixed expenses and additional shutdown expenditure together amount to ₹2,10,000. Expected sales for the forthcoming period are ₹14,00,000. What is the correct shutdown threshold in monetary terms and the financially preferable action?
A business has total fixed expenses of ₹6,60,000 and a P/V ratio of 30%. If the factory is closed, unavoidable fixed expenses and additional shutdown expenditure together amount to ₹2,10,000. Expected sales for the forthcoming period are ₹14,00,000. What is the correct shutdown threshold in monetary terms and the financially preferable action?
₹22,00,000; continue because expected sales exceed the threshold.
₹7,00,000; shut down because expected contribution is insufficient.
₹18,00,000; continue because expected sales are below ordinary break-even.
₹15,00,000; shut down because expected sales are below the shutdown threshold. (correct answer)
Answer: D — ₹15,00,000; shut down because expected sales are below the shutdown threshold.
Explanation. Net avoidable fixed expenses = ₹6,60,000 − ₹2,10,000 = ₹4,50,000. Shutdown threshold sales = ₹4,50,000 ÷ 30% = ₹15,00,000. Expected contribution = ₹14,00,000 × 30% = ₹4,20,000, which is ₹30,000 below the net avoidable fixed expenses. Therefore, temporary closure is financially preferable by ₹30,000, assuming no other relevant consequences.
Where it goes wrong. Dividing total fixed expenses by the P/V ratio instead of net avoidable fixed expenses.
Question 25 · 2 marks · Chapter 14: Marginal Costing · medium
Scenario. A manufacturing company has total fixed operating expenses of ₹12,00,000. If the facility is temporarily closed, expenses of ₹3,50,000 will continue to be incurred, including shutdown-preservation expenditure. The overall P/V ratio is 40%. Which statement correctly distinguishes the shutdown/continue threshold from ordinary break-even under the approach supported by the supplied ICAI Chapter 14 material?
A manufacturing company has total fixed operating expenses of ₹12,00,000. If the facility is temporarily closed, expenses of ₹3,50,000 will continue to be incurred, including shutdown-preservation expenditure. The overall P/V ratio is 40%. Which statement correctly distinguishes the shutdown/continue threshold from ordinary break-even under the approach supported by the supplied ICAI Chapter 14 material?
Shutdown/continue threshold is ₹21,25,000 and ordinary break-even sales are ₹30,00,000. The two calculations use different fixed-cost bases. (correct answer)
Both thresholds are ₹30,00,000 because unavoidable expenses must always be included in the shutdown threshold.
Shutdown/continue threshold is ₹30,00,000 and ordinary break-even sales are ₹21,25,000.
Both thresholds are ₹21,25,000 because unavoidable expenses are excluded from all marginal costing decisions.
Answer: A — Shutdown/continue threshold is ₹21,25,000 and ordinary break-even sales are ₹30,00,000. The two calculations use different fixed-cost bases.
Explanation. Net avoidable fixed expenses = ₹12,00,000 − ₹3,50,000 = ₹8,50,000. Shutdown/continue threshold = ₹8,50,000 ÷ 40% = ₹21,25,000. Ordinary break-even sales = ₹12,00,000 ÷ 40% = ₹30,00,000. The supplied ICAI material discusses relevant shutdown costs and the minimum sales necessary to meet avoidable fixed expenses. It does not separately define a formal term called 'financial shutdown point'; the ordinary BEP and shutdown/continue threshold should be distinguished by their respective fixed-cost bases.
Where it goes wrong. Treating the ordinary break-even calculation and the shutdown/continue decision as interchangeable or assuming that all fixed expenses disappear on closure.
ICAI SM: Cost and Management Accounting, Chapter 14 (Marginal Costing)
Questions people ask
What does this Chapter 14: Marginal Costing - Test 4 practice test cover?
This practice test carries 50 marks across 25 questions covering core costing principles, cost accounting standards, formulas, mathematical models, and practical ICAI case scenarios.
How many questions are there and what is the time limit?
There are 25 questions carrying 2 marks each, giving a maximum score of 50 marks in 60 minutes with no negative marking.
Which study material and syllabus apply to these questions?
Questions strictly reflect the official ICAI Study Material for CA Intermediate Paper 4 Cost and Management Accounting for the 2027 examination sessions.
Can I sit this test in both exam and practice modes?
Yes. Practice mode gives immediate answers with mathematical step-by-step workings and trap explanations after each question. Exam mode simulates actual exam conditions with a live timer and issues a downloadable performance certificate.
