CMA Final · Strategic Cost Management · Quality Cost Management
Mehta Auto Components currently spends Rs. 4,00,000 on prevention and appraisal and incurs failure costs of Rs. 9,00,000 a year. Management plans an extra Rs. 1,50,000 on prevention, which is expected to cut failure costs by 40%. What is the net annual saving?
The net saving is Rs. 2,10,000. Failure costs fall by 40% of Rs. 9,00,000, which is Rs. 3,60,000, and the additional prevention spending of Rs. 1,50,000 must be deducted. Ignoring the extra spend would overstate the benefit.
- ARs. 2,10,000Correct
- BRs. 3,60,000
- CRs. 1,50,000
- DRs. 5,10,000
Explanation
Failure cost reduction = 40% of Rs. 9,00,000 = Rs. 3,60,000. Net saving = Rs. 3,60,000 - Rs. 1,50,000 = Rs. 2,10,000. Rs. 3,60,000 ignores the extra spend.
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