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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Strategic Cost & Performance Management

Case: Godavari Textiles Ltd runs a kaizen programme at its spinning unit. Standard conversion cost is ₹80 per kg. Management targets a 5% cost reduction in each of two successive months, with each month's reduction applied to the previous month's cost. Annual output of 1,00,000 kg is assumed to be constant. What is the targeted conversion cost per kg at the end of month 2?

The targeted cost at the end of month 2 is ₹72.20 per kg. A 5% reduction on ₹80 gives ₹76 in month 1, and a further 5% on that reduced base gives ₹72.20. Applying both reductions to the original ₹80 would wrongly give ₹72.

  1. A₹72.00
  2. B₹72.20Correct
  3. C₹76.00
  4. D₹70.00

Explanation

Month 1 cost = 80 × 0.95 = ₹76. Month 2 cost = 76 × 0.95 = ₹72.20. The figure ₹72 comes from the mistake of subtracting 5% of the original ₹80 twice (4 + 4).

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