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CMA Final · Strategic Cost Management · Quality Cost Management

Narmada Auto Parts makes 40,000 units a year. Currently 5% are rejected at final inspection and scrapped, each costing Rs. 300 in lost production cost. A new Rs. 2,40,000 per year preventive maintenance programme will cut the rejection rate to 2%. What is the net annual saving or loss from the programme, considering only these items?

The programme yields a net saving of Rs. 1,20,000. Rejects fall by 3% of 40,000, i.e. 1,200 units, saving Rs. 3,60,000 at Rs. 300 each. Deducting the Rs. 2,40,000 programme cost leaves Rs. 1,20,000.

  1. ANet saving Rs. 1,20,000Correct
  2. BNet loss Rs. 1,20,000
  3. CNet saving Rs. 3,60,000
  4. DNet saving Rs. 2,40,000

Explanation

Rejects fall by 3% of 40,000 = 1,200 units. Savings = 1,200 x 300 = 3,60,000. Net = 3,60,000 - 2,40,000 = 1,20,000 saving. Rs. 3,60,000 ignores the programme cost.

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