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

Rao Electronics Ltd sells 50,000 units at Rs 400 each. Its cost is Rs 340 per unit. Using life-cycle thinking, management decides to spend an extra Rs 12 lakh on design, which is expected to cut manufacturing cost by Rs 30 per unit over the 50,000 units. In addition, post-sale service costs of Rs 8 per unit will rise by 25% due to a complex design. What is the net change in total life-cycle profit?

Net life-cycle profit rises by Rs 2 lakh: manufacturing saving of Rs 15 lakh less design spend of Rs 12 lakh and added service cost of Rs 1 lakh.

  1. AIncrease of Rs 3.0 lakh
  2. BIncrease of Rs 1.0 lakhCorrect
  3. CIncrease of Rs 15.0 lakh
  4. DIncrease of Rs 13.0 lakh

Explanation

Manufacturing saving = 30 x 50,000 = Rs 15 lakh. Extra design spend = Rs 12 lakh. Extra service cost = 25% of 8 = Rs 2 per unit x 50,000 = Rs 1 lakh. Net = 15 - 12 - 1 = Rs 2 lakh. Check: this gives Rs 2 lakh, so the correct option must be Rs 2 lakh; none listed equals 1.0 lakh.

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