CMA Final · Strategic Cost Management · Benchmarking
Narmada Textiles processes 80,000 purchase orders a year at a cost of Rs 36,00,000 in its procurement department. The best-in-class benchmark firm processes an order at Rs 30. If Narmada reaches the benchmark cost per order, what annual saving will it make?
The annual saving is Rs 12,00,000. Current cost per order is Rs 45 (36,00,000 divided by 80,000), which is Rs 15 above the benchmark of Rs 30. Multiplying the Rs 15 gap by 80,000 orders gives the saving.
- ARs 6,00,000
- BRs 12,00,000Correct
- CRs 24,00,000
- DRs 1,20,000
Explanation
Current cost per order = 36,00,000 / 80,000 = Rs 45. Gap = 45 - 30 = Rs 15. Saving = 15 x 80,000 = Rs 12,00,000. Rs 6,00,000 wrongly uses a gap of Rs 7.50 (half), and Rs 24,00,000 is the cost at benchmark, not the saving.
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