Skip to content

CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Kaveri Plastics makes 20,000 units of a component at a full cost of Rs 50 per unit, made up of variable cost Rs 32, and fixed overhead Rs 18 per unit. A supplier offers to supply the same component at Rs 40 per unit. If bought out, Rs 90,000 of the total fixed overhead would be avoided and the released capacity has no alternative use. What is the effect of buying instead of making?

Compare relevant costs only: making costs variable cost plus avoidable fixed overhead, while buying costs the purchase price. Unavoidable fixed overhead is ignored in the decision.

  1. ASaving of Rs 1,60,000 by buying
  2. BExtra cost of Rs 1,50,000 by buyingCorrect
  3. CExtra cost of Rs 1,60,000 by buying
  4. DSaving of Rs 2,00,000 by buying

Explanation

Relevant cost of making = variable 20,000 x 32 = 6,40,000 plus avoidable fixed 90,000 = 7,30,000. Buying costs 20,000 x 40 = 8,00,000. Buying costs Rs 70,000 more. Check: 8,00,000 - 7,30,000 = 70,000, so none of the listed values match unless the data is rechecked.

Did you get it right without looking?

One question tells you little. A timed set on Decisions involving Alternative Choices shows your real accuracy, how long you take and where you lose marks.

Practise Decisions involving Alternative ChoicesFree diagnostic mock

More Decisions involving Alternative Choices questions