CMA Final · Strategic Cost Management · Benchmarking
Kaveri Textiles benchmarks its defect rate against a leader. Kaveri produced 2,50,000 units with 5% defective; the benchmark defect rate is 2%. Each defective unit costs Rs 120 to rework. What is the annual rework cost that Kaveri would avoid by matching the benchmark?
Kaveri would avoid Rs 9,00,000 of rework cost. Defects fall from 12,500 (5%) to 5,000 (2%), a reduction of 7,500 units, and at Rs 120 per unit this is Rs 9,00,000. Using the total current defects instead would overstate the saving.
- ARs 9,00,000Correct
- BRs 15,00,000
- CRs 6,00,000
- DRs 7,50,000
Explanation
Defects now = 5% x 2,50,000 = 12,500. At benchmark = 2% x 2,50,000 = 5,000. Reduction = 7,500 units x Rs 120 = Rs 9,00,000. Check: gap 3% x 2,50,000 = 7,500. Rs 15,00,000 is the total current rework cost (12,500 x 120).
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