CMA Final · Strategic Cost Management · Benchmarking
Gupta Foods compares its defect rate with a benchmark partner. Gupta produces 2,00,000 units with a 4% defect rate, whereas the benchmark is 1.5%. Each defective unit costs Rs 60 in rework and scrap. If Gupta achieves the benchmark defect rate on the same volume, what is the annual saving?
The annual saving is Rs 3,00,000. The defect rate gap is 2.5 percentage points, so 5,000 fewer defective units on 2,00,000 produced. At Rs 60 per defective unit, the avoided rework and scrap cost is Rs 3,00,000.
- ARs 3,00,000Correct
- BRs 4,80,000
- CRs 1,20,000
- DRs 7,20,000
Explanation
Gap in defect rate = 4% - 1.5% = 2.5%. Defects avoided = 2,00,000 x 2.5% = 5,000 units. Saving = 5,000 x 60 = Rs 3,00,000. Rs 4,80,000 would be the cost of all current defects less nothing, i.e. 8,000 x 60, ignoring the benchmark.
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