Skip to content

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

Case: Kaveri Appliances Ltd, Coimbatore, plans a new mixer-grinder. The market can bear a selling price of Rs 3,000 per unit. The company requires a profit margin of 20% on selling price. Its current estimated cost is Rs 2,750 per unit. Under target costing, what is the cost reduction the company must achieve per unit?

The company must cut Rs 350 per unit. Target cost equals the market price of Rs 3,000 minus the required 20% margin of Rs 600, giving Rs 2,400. Since the current estimated cost is Rs 2,750, the shortfall to be removed through design and value engineering is Rs 350.

  1. ARs 350Correct
  2. BRs 150
  3. CRs 250
  4. DRs 600

Explanation

Target cost = selling price less required profit = 3,000 - (20% x 3,000 = 600) = Rs 2,400. Current cost is Rs 2,750, so the gap is 2,750 - 2,400 = Rs 350. Rs 250 wrongly uses the gap between price and current cost, ignoring the required margin.

Did you get it right without looking?

One question tells you little. A timed set on Strategic Cost & Performance Management shows your real accuracy, how long you take and where you lose marks.

Practise Strategic Cost & Performance ManagementFree diagnostic mock

More Strategic Cost & Performance Management questions