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

Case: Lotus Textiles Ltd, Surat, has a Kaizen costing programme. A fabric has a current cost of Rs 250 per metre. Management sets a Kaizen target of 4% cost reduction on the current cost in the coming year, with output of 3,00,000 metres. Which statement about the programme and its financial result is correct?

Kaizen costing seeks continuous small reductions on current cost. A 4% cut on Rs 250 is Rs 10, giving Rs 240 per metre. On 3,00,000 metres, the total saving is Rs 30,00,000.

  1. ACost falls to Rs 240 per metre; total saving Rs 30,00,000Correct
  2. BCost falls to Rs 246 per metre; total saving Rs 12,00,000
  3. CCost falls to Rs 240 per metre; total saving Rs 12,00,000
  4. DCost falls to Rs 246 per metre; total saving Rs 30,00,000

Explanation

4% of Rs 250 = Rs 10, so the new cost is Rs 240. Saving = 10 x 3,00,000 = Rs 30,00,000. Rs 246 results from subtracting 4 rupees rather than 4 percent.

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