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CMA Final · Strategic Cost Management · Decisions involving Alternative Choices

Sundaram Textiles in Tiruppur makes 20,000 shirts a year at a full cost of Rs 400 per shirt, of which Rs 90 is fixed overhead that is unavoidable. A supplier offers to supply the shirts at Rs 330 each. The capacity released would have no alternative use. What is the annual financial advantage or disadvantage of buying instead of making?

Buying is Rs 4,00,000 worse than making. Only avoidable costs are relevant, so the make cost is Rs 310 per shirt after excluding Rs 90 of unavoidable fixed overhead. The supplier charges Rs 330, which is Rs 20 more per unit, and 20,000 units give Rs 4,00,000.

  1. AAdvantage of Rs 8,00,000 from buying
  2. BDisadvantage of Rs 4,00,000 from buyingCorrect
  3. CDisadvantage of Rs 2,00,000 from buying
  4. DAdvantage of Rs 1,40,000 from buying

Explanation

Relevant cost of making = 400 - 90 = Rs 310 per shirt, because the fixed overhead is unavoidable. Buying costs Rs 330, so the difference is Rs 20 per shirt. Over 20,000 shirts this is Rs 4,00,000 extra cost from buying. Using the full cost of Rs 400 would wrongly show a saving of Rs 70 per shirt.

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