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

Ganga Pumps Ltd uses value chain analysis. Its activities cost Rs 40 lakh in inbound logistics, Rs 120 lakh in operations, Rs 30 lakh in outbound logistics, Rs 50 lakh in marketing and Rs 60 lakh in service, totalling Rs 300 lakh. A review shows that outbound logistics can be outsourced with a saving of 25% and service costs cut by 10% through better design. What will be the total cost after both changes?

The total cost falls to Rs 286.5 lakh. Outsourcing outbound logistics saves Rs 7.5 lakh (25% of 30) and better service design saves Rs 6 lakh (10% of 60), a total saving of Rs 13.5 lakh from Rs 300 lakh.

  1. ARs 285.0 lakh
  2. BRs 286.5 lakhCorrect
  3. CRs 262.5 lakh
  4. DRs 292.5 lakh

Explanation

Saving on outbound logistics = 25% of 30 = 7.5 lakh. Saving on service = 10% of 60 = 6 lakh. Total saving = 13.5 lakh. New cost = 300 - 13.5 = 286.5 lakh. Rs 292.5 lakh counts only the outbound saving.

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