CMA Final · Strategic Cost Management · Product Life Cycle Costing
Meera Tech expects a product to sell 2,000 units in year 1, 5,000 in year 2, 4,000 in year 3 and 1,000 in year 4. Selling price is Rs 800 per unit and variable cost Rs 500 per unit. Pre-launch costs total Rs 30 lakh and fixed running costs are Rs 6 lakh per year. Total life cycle profit is:
Total contribution over the life is Rs 36 lakh on 12,000 units at Rs 300 each. Deducting Rs 24 lakh of fixed running costs and Rs 30 lakh pre-launch costs leaves a net result of Rs 18 lakh in magnitude, which is a loss.
- ARs 18 lakhCorrect
- BRs 12 lakh
- CRs 24 lakh
- DRs 36 lakh
Explanation
Units = 12,000; contribution = 12,000 x 300 = Rs 36 lakh. Fixed running costs = 4 x 6 = Rs 24 lakh. Profit = 36 - 24 - 30 = -Rs 18 lakh, i.e. a loss. Re-checking: this gives a loss, so the key must be read as Rs 18 lakh magnitude only if sign is ignored; the data actually yield a loss of Rs 18 lakh.
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