MANAGEMENT ACCOUNTING AND FM – JUNE 2003

CAIIB ASSOCIATE EXAMINATION – JUNE 2003 MANAGEMENT ACCOUNTING AND FINANCIAL MANAGEMENT
SECTION – I
1. (A) Define any five of the following terms. i) Master Lease Master Lease provides for a period longer than the assets life and holds the lesser responsible for providing equipments in good working condition during the lease period. ii) Mixed Cost Costs that are fixed up to a certain level of output but will vary within certain range of output. iii) Earning Per Share Earning after-tax divided by number of common shares. iv) Call Option A contract which gives the holder the right to buy the physical or to buy the futures at a specific price within a specified period of time. v) IRR The internal rate of return (IRR) is calculated as being the rate at which the net present value of a project is Zero. vi) Opportunity Cost The value of the benefit sacrificed in favour of choosing a particular alternative or action. (B) Fill in the blanks with appropriate words / figures / phrase’s: i) ii) Loans and advances guaranteed by bank carry 20% risk weight. Inventories are valued at cost or REALISABLE VALUE whichever is LOWER.

19 Guidelines - CAIIB

v) The purchase of book debts / receivables is central to factoring. iii) Contribution means selling price minus fixed cost. should be included under current assets. TRUE: Decrease in stock denotes sale of Final Product.R. TRUE: Factoring is defined as “a continuing legal relationship between a financial institution (a ‘Factor’) and a business concern (‘the Client’) selling goods or providing services to trade customers (the ‘Customers’) on open account basis whereby the Factor purchases the clients’ book debts (account receivables) either with or without recourse to the client and in relation there to controls the credit extended to customers and administers the sales ledgers”. i. viii) Depreciation can be by two methods STRAIGHT LINE method and WRITTEN DOWN VALUE method. iv) Banks with higher C. Capitalization rate for a highly risky venture would be HIGHER. FALSE: Contribution means selling price minus variable cost or Fixed cost plus profit. Cash Flow is equal to net income plus DEPRECIATION. FALSE: Higher rate of interest for loans and advances means “Higher risk assets portfolio” which reduces the CAR. ix) x) (C) Fixed assets are those held not for SALE in usual course of business. State with reason/s in brief whether the following statements are TRUE or FALSE: i) Stock on hire is considered at full value by a lending banker while computing the receivable of a hire purchase company.A.. Hire purchase is a method of financing in which the ownership of an asset automatically passes on to HIRER on payment of full installments. stock-on-hire at full value less un-matured finance charges. For computing lending limit. Hence. the net figure of stock-on-hire. ii) Decrease in value of stock is a source of fund.CAIIB .MANAGEMENT ACCOUNTING AND FM – JUNE 2003 iii) iv) v) vi) vii) In case of multiple facilities asset classification is done BORROWER WISE.e. under hire purchase agreements’ (at agreement values less amounts received) at full value under current assets and un-accured portion of these receivables as ‘Un-matured Finance charges’ under current liabilities. Generally the importer’s bank AVALISE the bill of exchange in a forfeiting deal. An issue of bearer security issued in a currency other than that of the country of issue and sold internationally to raise funds is known as EURO ISSUE. it is source of fund to the organization. FALSE: Hire purchase companies in their balance sheets show the receivables in the form of ‘Stockon-hire’. charge higher rate of interest for their loans and advances. 20 Guidelines .

3.7.27.80.000 ii) In a branch of a bank.80. subsidy / govt. iv) A company is offered discount of 2% by its suppliers if payment is made within 10 days. loan.2003 a borrower’s account shows outstanding balance of Rs.1.000 (b) Rs. Debentures. (a) Rs. Net working capital = 2.50.50. The current assets will amount to Rs. (a) Leasing (b) Subsidy (c) Deferred Credit (d) Trade Credit REASON: Sources from which cost of project can be funded include equity.2003 would more than one year.000 (d) None of these REASON: The account should be treated as sub-standard asset because the borrower have not been reviewed / renewed for more than one year.00. Hence.55.50.CAIIB .00.000/. 10% provision is to be provide on outstandings i.000. as of 31. on Rs. The provision required to be made for this account as of 31.000 = Rs.000.20.having primary security of Rs.50.e.00. (a) Rs. (a) (c) (d) Avail of the discount Pay the creditors between 11th and 45th day Opt for none of these (b) Pay the creditors on 45 th day 21 Guidelines . Here current assets = 3. GDRs.5.Nil (b) Rs.000 (c) Rs.10.and collateral security of Rs.55. as against no discount for a credit period of 45 days.000/.00. i) Perusal of the balance sheet reveals that the current ration is 3:1.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 SECTION – II 2.000/-.1. current liabilities = 1.50. For 2 the net working capital is Rs.7.5.00.40. Deferred Credit.000/iii) Sources of financing project cost excludes TRADE CREDIT. Answer any four questions explaining in short reason/s for your choice in not more than fifty words and also workings wherever required. Net working capital is Rs.000 = Rs. Term Loans. venture capital. Public Deposits.50.3.000/-.1.20.2. Company should AVAIL OF DISCOUNT.2003 would be NONE OF THESE (PROVISION REQUIRED Rs.5. The provision required to be made for this account as of 31. leasing etc..20.00. FCCBs. However the limits of the borrower have not been reviewed / renewed for more than one year.3.000 x 10% = Rs.000 (c) Rs. Company’s rate of return on capital is 18%.00.000 (d) None of these REASON: Net working capital = Current Assets – Current Liabilities.00.000 For 3 the current assets is ? = 3/2 x 80.40.

It is derived when the average cost of capital is computed with marginal weights. ii) What is operating cycle ? The operating cycle is the length of time that elapses between the company’s outlay on raw materials. (a) (b) (c) (d) break even point is high IRR is higher than the cost of capital neither (a) nor (b) both (a) and (b) REASON: A project is acceptable for investment and finance if the IRR is more than the expected rate of return (determined by the management taking into account the opportunity cost of capital and risk factors involved). 22 Guidelines . better is the acceptability of the project. Stages generally are raw materials – work in progress – finished goods – sales – debtors – cash. statellites etc. v) A project is more acceptable for finance if IRR IS HIGHER THAN THE COST OF CAPITAL. money market debt instrument at a discount by well rated Corporate’s promising to pay the holder. iv) What is commercial paper ? Commercial paper is a short-term unsecured negotiable usance.25% which is more than the discount offered by its suppliers. 3. are typical examples. The weights represent the proportion of funds. Leasing of aircrafts. i) What is marginal cost of capital ? Marginal cost of capital is the cost of raising an additional rupee of capital. the firm intends to employ. iii) What is pay-back method ? Pay-back method is a selection method in which a firm sets a maximum payback period during which cash inflows must be sufficient to recover the initial outlay. The marginal cost of capital is calculated with the intended financial proportion of weights. higher the IRR. The Component cost may remain constant up to a certain level and then start increasing. This method ignores the time value of money and cash flow beyond the payback period.CAIIB .MANAGEMENT ACCOUNTING AND FM – JUNE 2003 REASON: If the company differ the payment for 45 days. Answer question number (i) and any three of the rest in 2 – 4 lines. then the Rate of Return for 45 days is = 45 / 360 x 18 = 2. So. In that case both the average cost and marginal cost of capital will rise at a faster rate. so the company should avail of the discount. wages and other expenditures and the inflow of cash from the sale of goods. v) What is big ticket lease ? Lease of the assets of bigger value running into several crores is called big-ticket lease. the face value on a certain future date at a specific place.

IDBI etc. A good example of a financial intermediaries is a mutual fund. involved in holding any security.000 units is as under: 23 Guidelines . The analysis of the cost per 10.4.72 per unit. (A) Write short notes on: i) Asset Securitization Securitization is a process of transformation of illiquid asset into security which may be traded later in the open market.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 SECTION – III 4. The term ‘Securitization’ refers to both switching away from bank intermediation to direct financing via capital market and / or money market and the transformation of a previously illiquid asset like automobile loans. These receivables of the future are shifted to mutual funds and bigger financial institutions. In the year 2003. 4. This process is similar to that of commercial banks seeking refinance from NABARD. and there is home market for the entire quantity at the sale price of Rs. (B) A company annually manufactures 10. Financial intermediaries are in a better position than individuals to bear and spread risks of Primary security ownership.4 per unit. It is beneficial to financial intermediaries.000 units only at a sale price of Rs. Because of their large size. into marketable instruments. intermediaries can diversify their portfolios and minimize the risk. ii) Financial Intermediation It involves financial institutions acquiring funds from the public by issuing their own instruments and then using the funds to buy primary securities. in turn lend to the ultimate borrowers. which pulls the financial resources of a number of people and invests in a basket of securities.CAIIB . mortgage loans.25 per unit. as it helps in enhancing lending funds. trade receivables etc. This is a method of recycling of funds.000 units of a product at a cost of Rs. It is a sort of indirect financing in which savers deposit funds with financial institutions rather than directly buying bonds and the financial institutions. It is a process of transformation of assets of a lending institution into negotiable instruments. They employ skilled portfolio managers. Future receivables EMIs and annuities are pooled together and transferred to a Special Purpose Vehicle (SPV). there is a fall in the demand for home market which can absorb 10. possess expertise in evaluation of borrowers creditworthiness can take advantage of economies in large-scale buying and selling. Financial intermediaries are firms that provide services and products that customers may not be able to get more efficiently by themselves in the financial market.3.

Hence sale of goods in the foreign market along with the home market is recommended. the present profit will be increased by Rs.e.000 units of the product (over initial 10.3.000 units) the fixed cost overheads will increase by 10%.Rs. Material Wages Fixed overheads Variable overheads 15.000 11.CAIIB .000 —————— 40. Is it worthwhile to try to capture the foreign market ? ANSWER TO QUESTION NUMBER : 4 (B) YEAR Market Sales(Units) COSTS Material Wages Variable Overheads Fixed Overheads TOTAL Profit / (Loss) Sales 8000 40000 2500 42500 8000 40000 (2800) 37200 1600 65600 5400 71000 9600 105600 2600 108200 6000 6000 12000 18000 15000 11000 15000 11000 30000 22000 45000 33000 2003 Home 10000 2004 Home 10000 2004 Foreign 20000 2004 Total 30000 ANALYSIS: With the expansion of the market to foreign sources.600 .000 —————— The foreign market is explored and it is found that this market can take 20..100/.2. 24 Guidelines .(i. Rs.2.55 per unit. It is also discovered that for additional 10.000 6.500).000 units of the product if offered at a sale price of Rs.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 Rs.000 8.

semi-variable expenses remain constant between 45% & 65% of capacity. increasing by 10% between 65% & 80% capacity and by 20% between 80% and 100% capacity.4 7. 25 Guidelines .7 20.5 Assume that the fixed expenses remain constant at all levels of production.5 7.9 3.5 6.6 7. in Lakh 100 120 150 180 200 Prepare a flexible budget for the year at 60% and 90% capacities and estimate the profit at these level of output. Sales at various levels are 50% capacity 60% capacity 75% capacity 90% capacity 100% capacity Rs.CAIIB . The following data is available for a manufacturing company for a period of 12 months (year) Rs.8 9. in Lakh Fixed Expenses Wages & salaries Rent rates and taxes Depreciation Sundry administrative expenses Semi-Variable Expenses (at 50% capacity) Maintenance and repairs Indirect Labour Sales department’s salaries etc. Sundry administrative expenses Variable expenses ( at 50% capacity ) Materials Labours Other expenses Total cost 21.9 —————— 98.0 —————— 3.4 6.8 2.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 5.

06 36.20 9.48 4. Expenses Total (B) 3.56 3.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 ANSWER TO QUESTION NUMBER : 5 Particulars 60% Variable Expenses Materials Labour Other Expenses Total (A) 26.50 ———— 30. ii.40 ———— 4.60 ———— 26 Guidelines .80 ———— 18. Rates & Taxes Depreciation Sundry Admn.72 14.40 7.60 180.60 7. Expenses Total (C) i.00 ———— Fixed Expenses Wages & Salaries Rent.60 6.00 ———— Capacity Level 90% Semi-variable Expenses Maintenance & Repairs Indirect Labour Sales Dept.50 7.90 3.00 ———— 108.48 ———— 60.36 ———— 21.00 120.00 ———— 6.22 ———— 90.04 24.40 6.50 9. salaries Sundry Admn.80 2. Total Cost (A) + (B) + (C) Sales PROFIT (ii – i) 9.00 ———— 141.50 ———— 30.CAIIB .00 ———— 38.00 ———— 12.50 6.48 9.00 ———— 39.

CAIIB . in agreed instalments with stipulated interest in the respective due dates. Explain elaborately the seven methods / ways of debit financing. in case of default in payment there of by the buyer. Debentures or Bonds. Public Deposits. A convertible debenture can be converted fully or partly into equity shares of the company as per the terms of its issue. They can sue the company and enforce the sale of security in case of default in redemption of their capital and payment of interest thereon at coupon or contractual rate and for period specified in the instrument. It provides for a fixed and often large amount of loan required either for setting up a new unit for financing the expansion / diversification / modernization of a project in terms of land. plant and machinery or permanent addition to current assets. ii) 27 Guidelines .MANAGEMENT ACCOUNTING AND FM – JUNE 2003 SECTION IV 6. debenture benefits the company as its payment obligation is fixed. There is no ownership dilution. Forfaiting. During inflationary period. As far as the buyer of the plant and machinery is concerned. Deferred Payment Guarantee (DPG). i) TERM LOAN: Term Loan is a method of debt financing with maturity period of over one year to about 10 years. However. a debentures has an attached warrant. Debentures can be floated in private placement basis or through public issue. External Commercial Borrowings (ECBs). they can apply for foreclosure or even for winding up of the company to safeguard their interest. FEATURES: A debenture is a long-term promissory note for raising loan capital. Sometimes. Hence. debentures are less costly. iii) DEBENTURES: A debenture is a document issued by a company under its seal evidencing indebtedness of the Company to its holder for the amount stated in it. DEFERRED PAYMENT GUARANTEE (DPG): A deferred payment guarantee is a contract under which a bank promises to pay the supplier the price of machinery supplied by him on deferred terms. term loan is also called Project Financing. building. as a ‘Sweetener’. Debenture holders are the creditors of the company. Unsecured loans. It is generally secured by a lien on the company’s specific assets and is issued for maturity of about 7 years. But. Interest paid on it one tax deductible. Long-term debt financing may be undertaken by a company by way of Term Loan. it serves the same purpose as term loan. Cash outflow is limited to interest and principal redemption and in certain. Debentures which are not secured fully or partly by a charge on the assets of the company are called unsecured or naked debentures. A warrant entitles the holder to buy a fixed number of ordinary shares at a pre-determined price during a specified period. Leasing and Hire purchase. MERITS AND DE-MERITS: Compared to equity financing. etc. TYPES: A debenture can be convertible or non-convertible. they have no voting rights.

The Implications of not meeting Capital Adequacy Norms (CAN) by the Banks are: a) Credibility : With increasing globalization of banking.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 iv) LEASING AND HIRE PURCHASE: Leasing and Hire purchase are innovative methods of financing. commodities and services with deferred credit period 1 to 5 years. No creation of charge in any asset of the company is necessary. cannot initiate cross-currency options. So. OR Explain with sufficient details implications of not meeting capital adequacy norms by the banks in India. all banks in India have to achieve it. But this mode of financing is dependant on the reputation of the company. ownership in assets gets automatically transferred to the hirer. vii) EXTERNAL COMMERCIAL BORROWING (ECB): Corporates can raise on their own strength External Commercial Borrowings (ECBs) which include suppliers’ credit. Indian banks will be rated in terms of international standards. v) PUBLIC DEPOSITS: A non-banking non-financial company can raise unsecured fixed deposits from its members. if all instalments are paid. 28 Guidelines . The company has to maintain in liquid assets 15% of the amount of deposits maturing during the current financial year. No sovereign guarantee is given to borrowings by public or private sector enterprises except in case of public sector units in power generation. project exports. To start with the foreign exchange business of such banks. without owing it. vi) FORFAITING: Forfaiting in one of the innovative methods of post-shipment export finance where 100% medium-term export receivables are discounted on a ‘without recourse basis’ to the exporter. Leasing is an arrangement under which a lessee (a firm or person) acquires the right to use an asset for a definite period. Otherwise.both domestically and internationally. This method of financing is essentially used for export of capital goods. loan from commercial banks and credit from officially sponsored agencies but excludes all borrowing with a maturity of less than a year. thus. Choice of currency of loan. in return for series of periodic lease rentals to the lessor (owner). Banks which fail to meet CAN. buyers’ credit .CAIIB . CAN enjoys world-wide consensus. will be adversely affected as banks and customers outside India may not accept LCs and guarantees issued by them. In the case of hire purchase. Public Deposits is a simple and less costly method of financing. Hire purchase is. A company can trade on equity by raising public deposit as the interest cost is fixed. directors and general public to the tune of 25% of its paid-up capital and free reserves for a period of more than six months and not more than three years. energy and strategic defence. the defaulting banks will lose credibility and acceptability . bailment for deferred sale where the hirer (bailee) has the option to purchase or return the goods before the payment of last instalment. the basis of interest rate (floating or fixed) and security to be provided to external commercial lenders are left to the borrowers.

but the additional equipment would be sold for Rs. In addition to this the advertisement expenditure will have to be incurred as under: 29 Guidelines . Capital Market: Due to budgetary constraints.000 units per annum.1 lakh. Initial equipment cost will be Rs.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 b) Staunted deposit growth: Cash-rich public sector enterprises prefer to park their surplus funds only with banks. perforce.120 lakh and additional equipment costing Rs. X Ltd. the deposit mobilization effort of such defaulting banks may be crippled. At the end of the 8th year.16 lakh per annum. the average yield of funds will come down adversely affecting the bottom line. is planning to introduce a new product with a projected life of 8 years. Fixed operating cash cost are likely to be Rs.100 per unit with a profit volume ratio of 60% is likely to be obtained.CAIIB . is unable to pump in further funds to bolster banks’ capital base. it may not secure a favourable response unless CAN is fulfilled. So. In the alternative. Foreign regulatory authorities also insist that individual foreign offices of Indian banks in those countries either meet CAN or face closure. Government of India has decided to grant autonomy / flexibility in some administrative / operational areas. increase the cost of borrowing and make the terms and conditions of borrowing – both domestically and internationally – unfavourable. the major owner of public sector banks in India. Meeting CAN is also one of the parameters on the basis of which the Ministry of Finance. who have reached CAN. Alternatively.00. the original equipment will have resale value equivalent to the cost of removal. Expansion & operational flexibility : Attaining CAN is one of the criteria for banks to be eligible to open new branches. banks may increasingly deploy funds in zero-risk sovereign securities which offer lower yield compared to commercial lending. c) d) e) f) 7. if a bank plans to raise capital through public issue. This will reduce the scope of its accessibility to market. Thus. This pressure will force them to reduce their commercial lending. Working capital of Rs. Government. Cost of borrowing: Failure to meet CAN will adversely affect a bank’s credit rating.15 lakh will be needed. economic growth will retard. The 100% capacity of the plant is of 4. Individual depositors may also show the same preference. In that event.10 lakh will be needed at the beginning of third year. Year 1 2 3-5 6-8 Capacity in Percentage 20 30 75 50 A sale price of Rs. This scenario will also make lesser loanable funds available for trade and industry. but the production and sales volume expected are as under. Profitability: Banks having problem of capital funds will. An existing profit making company. have to restrict their asset size.

507 7 .000 16. Taking 12% as appropriate after tax cost of capital.V.000 15.00. Factor 1 .000 16.000 68.60 per unit Fixed cost Advertisement Depreciation Profit / (Loss) Tax @ 50% Profit / (Loss) After Tax Add: Depreciation Cash inflow (13.00. 1.20.000 58.80.000 30.00.452 8 . find out N P V of net cash flows and recommend whether the project should be accepted or not.CAIIB .000 41.00.00.000 26.00.00.000 15.000 (13.636 5 .000 4.37.00.000 (Rs.000 6-8 2.00.797 3 .00.00.00.404 ANSWER TO QUESTION NUMBER:7 (a) Computation of initial cash outlay Equipment cost Working Capital TOTAL Calculation of cash-flow: Years Sales in Units 1 80.567 6 .50.000 3-5 3.00.25.000 48.00. Contribution @ Rs.20.000 16.000 1.893 2 .50.000 68. factors @ 12% are mentioned below: Year P. In lac) 120 15 ———— 135 ———— 30 Guidelines .000 83.000 16. 1.00.000 16.000 85.000) NIL 2 1.000 15.V.75.00.000 16.50.00.50.000 15. 72.000 Rs.75.000 13.25.00.00. straight line method of depreciation (permissible for tax purposes only).000 Rs. P.00.000) 15.000 Rs.00.00.000 Rs.000 13.712 4 .00.000 16.000 10.75.50.000 16.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 Year Expenditure in Rs.00.000 28.000 41.50.000 28.00. lakh each year 1 30 2 15 3-5 10 6-8 4 The company is subject to 50% tax.75.

73.2.25.000 58.000 40.00.25.32.24.000 —————— Rs. Factor @ 12% .404 Rs.V.31.800 54.000 —————— 1.50.42.000 74.21.000 —————— 74.78.000 1. 2.97.000 85. of CIF Years 1 2 3 4 5 6 7 8 CIF Rs.30.636 . for the year 2003 has been worked out to be 12.97.000* P.97 NPV of Cash Inflow PV of Cash Outflow Positive NPV Recommendation: Accept the project in view of positive NPV.00.000 Rs.450 Rs.450 —————— * Cash inflow Add: Equipment sold Working Capital 58.000 1.452 .69. 1.25.900 29.000 7.00.25.712 .000 31 Guidelines .893 .900 48. Sales 5.10.35.600 22.CAIIB .33.000 x 7.600 60.275 26.00.1.1.000 85.000 15.21.00.25.00.97.700 —————— 2.00.00.73.V.675 29.450 PV of cash outflow Additional Investment = Rs.25.99.53.567 .797 .MANAGEMENT ACCOUNTING AND FM – JUNE 2003 Computation of P.000 85.25.5% on the capital employed and the relevant figures are as under: Rs.000 28.000 Direct Material Direct Labour Variable overheads Capital Employed 2.507 .000 4.21. OR The profit of X Ltd.000 58.42.000 —————— 1.25.00.

000 —————— 22.50. You are required to find out (by giving details of computations) the cost and profit figures for the next year and make comments on the estimates of the sales manager.CAIIB .00.000 —————— Direct Material 2.000 40. the selling price increases by 4% and there is an overall cost reduction (for all the cost elements) by 20%.000 Year 2004 5.90.50% 2.00.000 —————— 3.28.000 —————— 44.800 —————— 35.000 88.000 Direct Labour 1. ANSWER TO ALTERNATIVE QUESTION NUMBER: 7 Calculation of costs for 2004 Particulars Cost for 2003 Add: 10% increase Due to increase in Volume Less: Cost Reduction by 20% Cost for 2004 55.10.000 —————— 48.000 60.000 Fixed Overheads 60.000 4.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 The new sales manager who has joined the company recently has estimated a profit of about 23% on the capital employed for the next year.000 Comparative statement of Profitability Particulars Sales Variable Cost Direct Material Direct Labour Variable overheads Total (B) 2.000 —————— 4.000 —————— 1.00. provided the volume of sales increases by 10%.10.20.000 —————— 1.000 35.000 —————— 1.800 —————— 4.000 1.000 45.00.50.75.72.800 48.80.000 —————— 2.20.43.000 25.00.200 —————— 3.000 Contribution A – B Less: Fixed Overheads PROFIT Capital Employed % of profit on capital employed 32 Guidelines .000 —————— 88.000 10.000 —————— 2.200 —————— 2.20% (A) Year 2003 5.000 —————— 50.000 0 —————— 60.000 Variable Overheads 40.000 —————— 8.200 —————— 12.000 12.

Calculation of fixed overheads of year 2003: Sales Less Profit Cost of goods sold 5. WORKING NOTES: 1.000 —————— Add: Increase in selling price by 4% 3.000 —————— 4.72.MANAGEMENT ACCOUNTING AND FM – JUNE 2003 Analysis: From the above workings it is observed it is observed that the estimates made by the new sales manager is nor correct since the estimated % of profit on capital employed comes to 45.50 / 100 = Rs.000 —————— Fixed overheads for the year 2003 3.00.4.000.000 —————— 5.00. Profit on capital employed: Profit for the year 2003 on capital employed = Rs.000 2.000 50.000 x 23/100 = 92.000 50.4.00.000 —————— 5. Sales for the year 2003 Add: Increase in volume by 10% 5.000 x 12.50.000 1.000 40.000 ——————60. Profit for the year 2004 estimated by new sales manager @ 23% on capital employed = Rs. Sales: Rs.20% which is very much higher than his estimate 23%.000 22.000 33 Guidelines .CAIIB .50.00.00.50.90.000 Less: Variable Cost Direct Material Direct Labour Variable overheads 2.50.