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CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Kaveri Plastics makes 20,000 units of a component with variable cost Rs 32 per unit. Fixed overhead of Rs 3,60,000 is allocated, of which Rs 90,000 would be avoided if the item is bought out. A supplier offers it at Rs 40 per unit, and the released capacity has no other use. What is the effect of buying instead of making?

Buying costs Rs 70,000 more than making. Making has relevant cost of Rs 7,30,000 (variable Rs 6,40,000 plus avoidable fixed Rs 90,000), while buying costs Rs 8,00,000. Unavoidable fixed overhead is irrelevant.

  1. AExtra cost of Rs 70,000 by buyingCorrect
  2. BSaving of Rs 70,000 by buying
  3. CExtra cost of Rs 1,60,000 by buying
  4. DSaving of Rs 90,000 by buying

Explanation

Making relevant cost = 20,000 x 32 = 6,40,000 plus avoidable fixed 90,000 = 7,30,000. Buying = 20,000 x 40 = 8,00,000. Buying costs Rs 70,000 more. Rs 1,60,000 results from ignoring the avoidable fixed cost.

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