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CMA Final · Strategic Cost Management · Quality Cost Management

Himalaya Gears makes 20,000 units a year. Currently 6% of units fail in-process inspection and are scrapped at Rs. 500 each. A new process control system costing Rs. 2,40,000 a year is expected to cut the in-process failure rate to 2%, and additionally avoid lost contribution of Rs. 100 per unit on 300 customer-rejected units a year. What is the net annual benefit of the system?

The net annual benefit is Rs. 1,90,000: scrap savings of Rs. 4,00,000 plus avoided lost contribution of Rs. 30,000, less the system cost of Rs. 2,40,000.

  1. ARs. 5,90,000Correct
  2. BRs. 3,50,000
  3. CRs. 3,80,000
  4. DRs. 3,20,000

Explanation

Scrap before = 6% x 20,000 = 1,200 units; after = 2% = 400 units; reduction 800 units x Rs. 500 = Rs. 4,00,000. Lost contribution avoided = 300 x 100 = Rs. 30,000. Total benefit = 4,30,000. Less cost 2,40,000 = Rs. 1,90,000.

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