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CMA Final · Strategic Cost Management · Introduction to Strategic Cost Management

Ganga Appliances Ltd compares its cost structure with a rival. Ganga's cost per unit is Rs 900 against the rival's Rs 800, and both sell at Rs 1,000. Ganga's management is pursuing a cost leadership strategy. Which conclusion follows from the data?

Ganga has a cost disadvantage of Rs 100 per unit against the rival. Measured against the rival's cost of Rs 800, the gap is 12.5%. A cost leader would need the lowest cost in the industry, which Ganga does not have.

  1. AGanga is a cost leader because its margin is Rs 100
  2. BGanga has a cost disadvantage of Rs 100 per unit, which is 12.5% of the rival's costCorrect
  3. CGanga has a cost advantage of Rs 100 per unit
  4. DGanga has a cost disadvantage of Rs 100 per unit, which is 11.1% of its own cost

Explanation

Ganga's cost is Rs 100 higher than the rival's, so it is at a disadvantage. Relative to the rival's cost base: 100/800 = 12.5%. Option D uses 100/900 = 11.1%, the wrong base for benchmarking against the rival.

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