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CMA Final · Strategic Cost Management · Product Life Cycle Costing

Kaveri Electronics plans a gadget with total life-cycle cost of ₹1,20,00,000 over 30,000 units. Of this, 80% is committed (locked in) at the design stage but only 10% is actually spent by then. Design engineers find a change that cuts committed cost by 5% of the total life-cycle cost. The saving per unit from this design change is:

The design change saves 5% of the total life-cycle cost of ₹1.20 crore, which is ₹6 lakh. Spread over 30,000 units this is ₹200 per unit. Applying 5% to only the committed portion would use the wrong base.

  1. A₹ 200Correct
  2. B₹ 20
  3. C₹ 400
  4. D₹ 100

Explanation

The change cuts 5% of the total life-cycle cost: 5% × 1,20,00,000 = ₹6,00,000. Divided by 30,000 units this is ₹200 per unit. Using 5% of the 80% committed cost (₹4,80,000, i.e. ₹160) is the wrong base, since the saving is stated as a percentage of the total.

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