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CMA Final · Entrepreneurship and Startup · Value Addition

A startup's product sells for Rs 500. Bought-in materials and services cost Rs 300 per unit. Wages and other conversion costs are Rs 120 per unit, and the owner's profit is Rs 80 per unit. If it negotiates a 10% reduction in bought-in costs with no other change, by how much does value added per unit change, and what happens to the share of wages in value added?

Value added rises by Rs 30 to Rs 230. Initially it is 500 minus 300, which is Rs 200. A 10% cut in bought-in costs saves Rs 30. With wages unchanged at Rs 120, their share falls from 60% to about 52%.

  1. AValue added rises by Rs 30 to Rs 230, and the wage share falls from 60% to about 52%Correct
  2. BValue added rises by Rs 30 to Rs 230, and the wage share stays at 60%
  3. CValue added falls by Rs 30 to Rs 170, and the wage share rises to about 71%
  4. DValue added is unchanged at Rs 200, as bought-in costs are not part of it

Explanation

Initial value added = 500 - 300 = Rs 200 (wages 120 + profit 80). A 10% cut in bought-in costs saves Rs 30, so value added becomes Rs 230. Wage share was 120/200 = 60% and becomes 120/230 = 52.2%. The 'falls to Rs 170' option reverses the sign of the saving.

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