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

Case: Narmada Appliances Ltd plans a mixer-grinder. Market research shows customers will pay ₹5,000 per unit. The company requires a 20% margin on selling price. The current estimated cost is ₹4,300 per unit. Value engineering is to be used to close any gap. By how much must cost be reduced to reach the target cost?

The cost must fall by ₹300. Target profit is 20% of ₹5,000, which is ₹1,000, so target cost is ₹4,000. Against the current estimate of ₹4,300, the shortfall to be removed through value engineering is ₹300 per unit.

  1. A₹300Correct
  2. B₹700
  3. C₹500
  4. D₹1,000

Explanation

Target profit = 20% × 5,000 = ₹1,000. Target cost = 5,000 - 1,000 = ₹4,000. Cost reduction needed = 4,300 - 4,000 = ₹300. Choosing ₹700 results from applying the margin as 20% on cost (not on price) or other base errors; ₹1,000 mistakes the margin for the gap.

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