Strategic Cost Management

Ans 1.
Introduction

In the world of business management the ability to analyze and evaluate financial metrics is
crucial for strategic decision-making. This activity is focused on the calculation of the most
important performance indicators such as the contribution ratio, PV Ratio Break-Even Rate,
Margin of Safety, and the calculation of sales volume in order to achieve a specific profit margin.
These performance indicators are vital in the assessment of a company's financial health along
with operational efficiency, and the strategy to maximize profit. In the event of analyzing a
hypothetical case with the sale of watches and a set of costs and sales prices, we embark on an
analysis. The analysis does not just highlight the company's current financial standing and helps
to forecast the future requirements for financial performance and results. The goal is to simplify
the concepts in finance and demonstrate their use in a business context and provide a thorough
knowledge of how businesses deal with financial challenges and opportunities.

Concept and analysis

In fee accounting and financial assessment, contributions are the result of over the variable cost
of sales, aiding in covering fixed costs while also generating profits. It's important to
comprehend how sales affect financial goals.

Mathematically, contribution can be determined using the formula:

Contribution (C)=Sales-Variable CostsContribution (C)=Sales-Variable Costs

Variable costs fluctuate with production as well as the contribution margin, which reveals the
portion of sales profits that are used to cover profit and fixed costs. crucial for pricing, making
decisions, and analysis of breakevens.
1. Contribution (C):

C = Sale Price - Variable Cost per unit

2. PV Ratio (Profit Volume Ratio):

The profit volume (PV) Ratio Also known as the Profitability Index or Contribution to sales
Ratio. It is an economic metric expressing the relationship between the profit margin for
contribution as well as sales. The ratio can be expressed as a percent and is an essential measure
of the effectiveness and profitability of a business.

The PV Ratio will provide insights on how much the income from a rupee contributes for closing
fixed expenses and earning profit. An improved PV Ratio is a sign of higher contribution rates
and, as a result an even greater chance to cover constant costs and generate profit from each
purchase.

PV Ratio = C\Sale Price X 100

3. Break-even (BE) Analysis:

Break-even analysis is a calculation in finance that enables businesses to determine what level of
sales they will make or production where all revenue equals the total fee result in neither profit
nor loss. The term "butter-even" refers to the "smash-even point. The analysis is essential for
businesses to make informed price, sales, and decisions regarding cost management.

There are two primary components in break-even analysis two main components: fixed costs and
variable costs.

1. Fixed expenses (FC): Charges that do not fluctuate with the amount of production or sales.
Examples include salaries, rent or insurance costs, as well as other overhead costs.

2. Variable charges (VC): Those costs vary in direct proportion to the production level or
income. Examples include raw substances directly employed labour, direct costs, and direct
variable costs.
After the threshold for spoil-even has been established, the company can determine the effect of
variations in sales on profitability. When sales exceed the breakeven mark, the company is
earning a profit. However, If they fall short an amount, it's taking losses.

Evaluation of the Wreck Eye is an important tool for planning financials for setting sales targets
and assessing the validity of an enterprise model. It allows companies to know the minimum
amount of sales necessary to cover costs and be able to prevent losses.

BE Point (in units) = Fixed Costs\Contribution per unit

BE Point (in value) = BE Point (in units) X Sale Price per unit

4. Margin Of Safety (MOS):

The Margin of safety (MOS) is an economic metric that is used to determine how much actual
sales exceed the ruin-even point. It's a cushion or buffer sector between the present stage of sales,
and the damage-even level, which shows how an organization can handle unanticipated
fluctuations in income or the occurrence of other risks.

The margin of securing, measured in terms of units and value, is the difference between sales
actual and break-even threshold. It signifies a buffer against economic fluctuations or sales
fluctuations that can provide financial flexibility. A higher margin can ensure that the business
will be able to withstand declines in sales without incurring losses.

Conversely, the Margin of safety indicates that the company operates with an enlargement of its
buffer. the lower revenue could bring closer to break-even and the possibility of losing money.

MOS (in value) = Actual Sales - BE Sales

5. Number of units to achieve a target profit:

Target Profit (in value) = Total Sales - Total Costs

Number of units to achieve target profit} =

Target Profit (in value) / Contribution per unit

Now, let's calculate these values using the given information:

Sale Price per unit = 10,000

Variable Cost per unit = Raw Material + Power + Factory Wages (variable)

= 5,000 + 500 + 1,000 = 6,500

Fixed Costs = Rent + Salaries + Telecom and Printing + Travel

= 80,000 + 1, 00,000 + 45,000 + 25,000

= 2, 50,000

Total Sale} = Actual Sales = 9,00,000

1. Contribution (C):

C=Sale Price−Variable Cost per unit=10,000−6,500

=3,500

2. PV Ratio:

PV Ratio = C X 100 = 3500 X 100 = 35%

Sale Price 10500

3. Break-even (BE) Analysis:

BE Point (in units) = Fixed Costs = 250000 = 71.43

 Contribution cost 3500

BE Point (in value)=BE Point (in units) X Sale Price per unit

= 71.43×10,000

=7, 14,300

4. Margin of Safety (MOS):

MOS (in value) = Actual Sales - BE Sales

= 9, 00,000 - 7, 14,300

= 1, 85,700

5. Number of units to achieve a target profit:

Target Profit (in value) = Total Sales - Total Costs

= 18,000

Number of units to achieve target profit = Target Profit (in value) Contribution per unit =

18,000 /3,500 = Approx 5.14

To earn at least Rs. 18,000, it is necessary to increase the number of units and then sell 6 units,
since fractions of a unit can't be sold.

Conclusion

The exercise of calculating the Contribution, PV Ratio, Break-Even Ratio, Margin of Safety, and
the number of units required to meet a set profit threshold is a testament to importance of
financial analysis for business management. With this process of analysis, businesses have the
information to make educated decisions which affect profitability and sustainability. These
calculations are not mere numbers on a piece of paper as they are sophisticated metrics that
provide a picture of the company's performance in terms of efficiency, cost management, and
market position. The knowledge gained from this exercise can help businesses make better
decisions, optimize their operations, and realize financial objectives. The ability to master these
financial metrics enables businesses to navigate the market with confidence and clarity for long-
term success, and durability in a highly competitive environment.

Ans 2.

Introduction:

Effective pricing is essential in the planning and management of companies, impacting the
company's profitability, market share along with overall performance. Pritam an owner of a
glass-making factory that focuses on glasses and cups has to choose the pricing approach for a
purchase of 10,000 glasses. This case allows a deeper understanding of the basics and methods
of two prominent pricing strategies, cost Plus Pricing and Variable value PLUS Contribution
Price.

Pricing decisions play a key part in the success of a business, affecting both short-term goals for
economic growth and long-term competitiveness. In the context of Pritam's glass production
facility, understanding the pricing strategies is essential to make well-informed choices that
coincide with the business's objectives and market conditions.

This paper explains the intricacies of Price Plus Pricing, where the selling price is determined
using a markup to the total cost, and variable Cost Plus Contribution Pricing. This method seeks
to cover ongoing costs as well as creating some contribution margin. Examining these methods
requires you to calculate sales prices under each method, and comparing the results and
determining the circumstances under which each method is beneficial.

Concept & Application

The analysis goes on to consider the scenario in which Pritam has the resources to create the
glasses without being liable for the additional fixed cost. The dialog examines the implications of
picking between the two pricing models in a way that focuses on the strategic considerations that
will guide Pritam's selection process.

Cost Plus Pricing:

Cost Plus Pricing a simple process where the selling cost is determined by adding a markup on
the value of production. In this instance, Pritam targets an earnings margin of 10%. The formula
for Value Plus Pricing is:

Selling Price=Variable Cost per Unit+(Fixed Costs / Total number of units)+Profit Percentage in
Variable Cost per Unit

Let's calculate the selling cost using the given values:

Selling Price=45+(300,000 20000 )+0.10x45

Selling Price=45+15+4.5 =

64.5 Rs. per glass

Variable Cost Plus Contribution Pricing:

Variable Cost plus Contribution Pricing is a strategy which considers the variable cost per unit. It
aims to cover fixed costs while generating a contribution margin. The contribution margin
represents the percentage of the sale price that contributes to taking care of fixed costs and profit.
In the formula, it is

Selling Price=Variable Cost per Unit+ (Fixed Costs / Number of Units)

+Contribution Margin Percentage × Selling Price

Given a contribution margin of 20%, we can rearrange the formula to solve for the selling price:

Selling Price =
Comparison:

In this situation, the Cost Plus Pricing produces an overall selling price of 64.5 Rs. per glass. In
contrast, the Variable Cost Plus Contribution Pricing yields 75 Rs. per glass. This significant
difference is due to the inclusion of a contribution margin in this method.

When to Apply Each Method

Cost Plus Pricing:

Advantages:

 Simple: Cost Plus Pricing simple to calculate and comprehend.

 Value recovery: It ensures that every expense, no matter how variable and fixed is
covered.

Risks:

 Ignores market conditions: The method does not take into consideration the amount that
customers are willing to pay, which could result in the under or over-pricing of a product.
 Profit uncertain: The fixed profit margin will not reflect market dynamics, affecting
competitiveness.

Variable Cost Plus Contribution Pricing:

Advantages:

 Market-driven: Considers market demand as well as competitor pricing.

 Flexibility permits adjustments to be made based on variations in variable prices or
market conditions.
  Contribution assessment: Provides insight into the part of the selling price, which
contributes to taking care of fixed prices while also making revenue.

Disadvantages:

 Complexity Calculating contribution margins takes an in-depth knowledge of pricing

structures, market trends and cost structure.
 Capacity to under estimate fixed costs If fixed charges are undervalued, this could cause
inadequate insurance coverage and lower profit.

Surplus Capacity Scenario

If Pritam has a surplus capacity to manufacture glasses, without incurring any additional fixed
costs, the variable value plus Contribution Pricing technique is attractive. In this case, Pritam can
capitalize on its ability to control prices in accordance with market conditions. He is able to offer
a reasonable selling rate, which has the potential to be more as well as increase market share,
maximizing overall profitability.

Conclusion:

In conclusion, choosing the best pricing strategy is crucial to ensure business success. Both price
plus pricing and variable cost plus contributions have their advantages and disadvantages. Price
plus Pricing offers simplicity and allows for fee recovery, but does not take into account market
dynamics. On the other hand, Variable value Plus Contribution Pricing will take into
consideration market conditions and offers flexibility, however it requires greater understanding
of prices and contributions.

In the above scenario, it is assumed that Pritam hopes to earn 10%, the cost plus Pricing results
in a charge for selling that is 64.5 Rs. per glass. In the event that he implements Variable Value
Plus Contribution Pricing that has an 20% contribution margin The selling price increases to 75
rupees. per glass. If Pritam has the potential to grow this method is more efficient, allowing him
to alter prices in response to market conditions and gain the competitive edge.
Deciding on the best pricing strategies depends on the market's dynamics, opposition and
Pritam's own business goals. Consider these elements to guide Pritam when deciding on which
pricing strategy is most compatible with his goals and maximizes the profit margins of his glass
manufacturing business.

Ans 3a.

Introduction:

Extending loans is a crucial aspect of banking and is essential to evaluate the borrower's fiscal
health and ability to repay. In the instance of Divya seeking a loan at Dhanalaxmi Bank for her
business plans, the loan's approving agent will be analyzing various financial indicators to
determine the risk associated with the loan. This requires a thorough review of Divya's finances
and performance metrics in order to verify that she's able and able to repay this loan and also pay
interest.

Concept and Application:

Debt-to-Equity Ratio:

The ratio of debt to equity is an essential monetary metric that measures the percentage of a
firm's capital source from equity as opposed to debt. It's a significant indicator of the leverage in
economics of a business and provides information about the amount of threat associated with the
capital shape.

Formula:

Debit-to-Equity Ratio = Total Debt / Shareholders" Equity

Where:

 Total debt is comprised of short-term and long-term debt.

  Equity of shareholders represents the owners' stake in the business.

Application:

For Divya's loan, a lower Debt-to-equity ratio is generally recommended. The lower ratio implies
less the reliance on debt to finance and suggests a more stable financial structure. Dhanalaxmi
Bank may offer the loan if Divya has a decent Debt-to equity ratio, indicating a lesser risk of
financial instability.

ICR:

The interest coverage Ratio evaluates the ability of a company to fulfill its obligation for interest
by operating its earnings. It is a vital indicator to determine the financial viability of an enterprise
and the capacity to pay its debt.

Formula:

Interest Coverage Ratio = Operating Income / Interest Expense

Where:

 Operating income refers to earnings before taxes and interest (EBIT).

 The cost of interest is the interest payments on the company's debts.

Application:

A higher ratio of interest coverage indicates a higher capability to provide for interest payment.
For Dhanalaxmi Bank, a robust interest coverage ratio for Divya's company implies a reduced
risk of falling behind on interest payments. This makes the approval for loans more favorable
indicating that Divya's business generates sufficient profits to meet its interest obligations in a
reasonable manner.

Conclusion:

In conclusion, analyzing the financial ratios of a possible borrower is an important step in the
mortgage approval process for the bank. The ratio of equity to debt provides insight on the
organization's financial condition and financial leverage. A lower ratio representing a healthier
financial situation. The rate of interest insurance in contrast, assesses the ability of the business
to meet its financial payments, with higher ratio indicating a stronger potential to service debt.

For Divya's loan service, Dhanalaxmi Bank ought to cautiously study these ratios to lower the
risk related to the loan. An intelligent approach is to consider not just the financial condition of
the business but also its performance in the past and the possibility of future increases. Through a
thorough examination of these economic ratios the loan's approval officer will make
knowledgeable decisions that align with the bank's rules for risk management and improve the
bank's and the borrower's entire financial security.

Ans 3b.

Introduction

Budgeted profit analysis for company PQR Ltd involves a systematic way of predicting the
economic results of the upcoming fiscal year. This method integrates different elements
including sales volume strategy for pricing, cost, fixed costs, and semi-variable costs. Through
the examination of these components for four distinct products namely P, Q R, S, and P The
business will gain an understanding of its potential profits. This analysis is essential for strategic
planning, resource allocation and financial management. It allows Company PQR Ltd to make
informed decisions that align with its goals in terms of finances and market dynamics.

Concept & Application

In order to calculate the budgeted income for the company PQR Ltd. We must take into account
the revenue from income in addition to variable costs, regular charges, and semi-variable prices.
Let us calculate the relevant amounts for each item (P Q, R, S) and then make a decision on the
overall Budgeted profit.

1. Sales Revenue: Sales Revenue=No. of Units × Sales Price per Unit

2. Total Variable Costs: Variable Costs=No. of Units × Variable Cost per Unit

3. Semi-Variable Expenses: The fixed component is Rs. 150,000.

The variable component is Rs. 10 per unit of production beyond the fixed component.

Semi Variable Expenses=Fixed Component + (Variable Component per Unit × Excess Units)

Total Costs: Total Costs = Variable Costs + Fixed Costs + Semi-Variable Expenses

Total Costs =Variable Costs + Fixed Costs + Semi-Variable Expenses

Budgeted Profit:

Budgeted Profit =Sales Revenue−Total Cost

Let's calculate these values for each product and then determine the overall Budgeted Profit.

Product P:

 Sales Revenue_P = 20 units * Rs. 100 per unit

 Variable Costs_P = 20 units * Rs. 40 per unit

 Semi-Variable Expenses_P = Rs. 150,000 (fixed component) + Rs. 10 per unit * (20 units
- 15 units)

 Total Costs_P = Variable Costs_P + Fixed Costs + Semi-Variable Expenses_P

 Budgeted Profit_P = Sales Revenue_P - Total Costs_P

Repeat the above steps for Products Q, R, and S.

Finally, calculate the overall Budgeted Profit by summing up the Budgeted Profits for each
product.

Let's perform the calculations:

Product P:

 Sales Revenue_P = 20 units * Rs. 100 per unit = Rs. 2,000

  Variable Costs_P = 20 units * Rs. 40 per unit = Rs. 800

 Semi-Variable Expenses_P = Rs. 150,000 (fixed component) + Rs. 10 per unit * (20 units
- 15 units) = Rs. 150,050

 Total Costs_P = Variable Costs_P + Fixed Costs + Semi-Variable Expenses_P

 Budgeted Profit_P = Sales Revenue_P - Total Costs_P

Now, repeat the above calculations for Products Q, R, and S.

them up to get your overall profit for PQR Ltd. PQR Ltd. PQR Ltd.

The budgeting process used by PQR Ltd. involves meticulously studying various economic
factors in order to determine what the expected profits will be of the upcoming fiscal year. With
the help of income revenue the variable cost, fixed costs, and semivariable expenses for every
product (P Q, R, S) the business can be able to comprehend its financial situation in a
comprehensive manner.

Conclusion

The budgeting task provided insights into how the finances perform of every product,
considering the respective costs of income along with variable costs and the peculiar issue of
semi-variable energy prices. Estimating the budgeted profit for each product permits a thorough
examination of income contribution of different product varieties.

Affecting fixed cost and semi-variable expenses for power adds a layer of complexity in the
process of budgeting. For example, if you add Rs. 150,000 fixed element of the semi-variable
power costs and a further Rs. 10 per unit in excess of the fixed component, provides an accurate
picture of the cost structure.

The calculated budgeted income for each product gives valuable insights into the financial
effectiveness of PQR Ltd.'s portfolio of products. It's an instrument for making decisions in
management, allocating the resources, pricing strategies as well as overall planning for
financials.