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CMA Final · Strategic Cost Management · Introduction to Strategic Cost Management

Lakshmi Pumps Ltd has a value chain with these costs per pump: own R&D, design and production Rs 2,400; distribution through dealers Rs 600; supplier-side cost of castings, bought at Rs 900 included in production above. The firm negotiates with the supplier to redesign castings, reducing the casting price by 10% with no change in quality, and the saving is not shared with the supplier. Assuming nothing else changes, the revised total cost per pump (production plus distribution) is:

The revised cost is Rs 2,910 per pump. Total cost is Rs 3,000, the casting cost of Rs 900 is already included in production, and a 10% price cut saves Rs 90, giving Rs 2,910. Adding castings again or ignoring the saving gives wrong figures.

  1. ARs 2,910Correct
  2. BRs 2,490
  3. CRs 3,000
  4. DRs 2,700

Explanation

Total cost = 2,400 + 600 = 3,000, with castings of 900 already inside production. A 10% reduction saves 90, so the new cost = 3,000 - 90 = 2,910. Rs 3,000 ignores the saving; Rs 2,490 wrongly deducts 10% of 3,000 less 600... it double-counts the casting cost as extra.

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