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CMA Final · Strategic Cost Management · Relevant Cost Analysis

Sagar Auto makes a component at a variable cost of Rs 70 per unit and avoidable fixed cost of Rs 20,000 per month on 5,000 units. A supplier offers it at Rs 78 per unit. If bought, the freed capacity can earn a contribution of Rs 25,000 per month elsewhere. What is the monthly financial effect of buying instead of making?

Buying gives a monthly advantage of Rs 5,000. Making costs Rs 3,70,000 (variable plus avoidable fixed). Buying costs Rs 3,90,000 but releases capacity earning Rs 25,000, so the net cost is Rs 3,65,000, which is Rs 5,000 lower than making.

  1. AAdvantage of Rs 5,000Correct
  2. BDisadvantage of Rs 15,000
  3. CAdvantage of Rs 25,000
  4. DDisadvantage of Rs 5,000

Explanation

Making costs 5,000 x 70 + 20,000 = Rs 3,70,000. Buying costs 5,000 x 78 = Rs 3,90,000, less Rs 25,000 contribution gives net Rs 3,65,000. Buying is cheaper by Rs 5,000. Ignoring the contribution gives a disadvantage of Rs 20,000.

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