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

Vihaan Electronics Ltd uses the following strategic positioning analysis for a product. Selling price Rs 1,500 per unit, current cost Rs 1,200 per unit, and sales 10,000 units. A competitor launches a similar product at Rs 1,350. Vihaan decides to match the price and, to retain the earlier unit profit, aims at a cost reduction strategy through value chain improvement. If it matches the price and attains the cost needed to keep the same profit per unit, what total cost saving is required annually compared with the current cost base?

The required annual saving is Rs 15,00,000. Keeping a profit of Rs 300 per unit at a price of Rs 1,350 requires a cost of Rs 1,050, which is Rs 150 below the current Rs 1,200. Multiplying by 10,000 units gives the saving.

  1. ARs 15,00,000Correct
  2. BRs 12,00,000
  3. CRs 30,00,000
  4. DRs 18,00,000

Explanation

Current profit per unit = 1,500 - 1,200 = 300. At price 1,350, the cost for profit of 300 is 1,050. Required reduction = 1,200 - 1,050 = 150 per unit. For 10,000 units this is Rs 15,00,000. Rs 30,00,000 wrongly uses 300 per unit.

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