PROJECT REPORT ON

Marketing Strategy Adopted by Fairness Cream Manufactures in Wardha City

Submitted to the Rashtrasant Tukadoji Maharaj Nagpur University, Nagpur as a partial fulfillment of Bachelor of Business Administration
Submitted By
Ms. Shilpa Gedam

Guided By
Me

Mr. Mohan Savade

Department of Commerce & Management

New Arts, Commerce & Science College, Wardha

2010-2011
Department of Commerce & Management

New Arts, Commerce & Science College, Wardha

Certificate
This is to certify that the Project Report entitled

Marketing Strategy Adopted by Fairness Cream Manufactures in Wardha City

Submitted By
[

Ms. Shilpa Gedam

Has been duly completed in satisfactory manner as a partial fulfillment of the award of Bachelor of Business Administration
Rashtrasant Tukdoji Maharaj Nagpur University, Nagpur, under my supervision and guidance.
Project Guide

Mr. Mohan Savade

Mr Mohan Savade Vandana Palsapure (Co-ordinator) (Principal) Dr.

Acknowledgements

To acknowledge all the persons who had helped for the fulfillment of the project is not possible for any researcher but in spite of all that it becomes the foremost responsibility of the researcher and also the part of research ethics to acknowledge those who had played a great role for the completion of the project. So in the same sequence at very first, I would like to acknowledge my parents because of whom I got the existence in the world for the inception and the conception of this project. Later on I would like to confer the flower of acknowledgement my guide Mr Mohan Savade and other faculty members who taught me that how to do project through appropriate tools and techniques. Rest all those people who helped me are not only matter of acknowledgment but also authorized for sharing my success.

Rupesh Bharati

DECLARATION

I hereby declare that this project submitted by me is based on actual work carried out by me under the guidance and supervision of Mr Mohan Savade . Any reference to work

done by any other person or institution or any material obtained from other sources have been duly cited and referenced. It is further to state that this work is not submitted anywhere else for any examination.

Rupesh Bharati
Date

Contents
Chapter 1 Introduction to Logistics Chapter 2 Objective of Study Chapter 3 Research Methodology Chapter 4 Company Profile DHL Chapter 5 Data Analysis & Interprtation Chapter 6 Conclusions & Suggestions 1-7 8--8 9-10 11-39 40-48 49-51

1. 2.

Bibliographie Questionnaire

Introduct ion

Leverage Analysis In finance, leverage or leveraging refers to the use of debt to supplement investment. Companies usually leverage to increase returns to stock, as this practice can maximize gain (and losses). The easy but high risk increases in a stock prices due to leveraging at US banks has been blamed for the usually high rate of pay for top executives during the recent banking crisis, since gains in stock are often rewarded regardless of method. Delivering in the action of reducing borrowings. In microeconomics, a key ensure of leverage is debt to GDP ratio. There are three types of leverage 1. Operating leverage 2. Financial Leverage 3. Combined Leverage Cost Behavior Separating Mixed Costs into their variable and fixed elements. Mixed costs are common to a wide range of firms. Examples of mixed costs include sales compensation, repairs and maintenance, and factory overhead in general. Mixed costs must be separated into the variable and fixed elements in order to be included in a variety of business planning analyses such as CostVolume-Profit (CVP) Analysis. The way a specific cost reacts to changes in activity levels is called cost behavior. Costs may stay the same or may change proportionately in response to a change in activity. Knowing how a cost reacts to a change in the level of activity makes it easier to create a budget, prepare a forecast, determine how much profit a new product will generate, determine which of two alternatives should be selected. Fixed costs Fixed costs are those that stay the same in total regardless of the number of units produced or sold. Although total fixed costs are the same, fixed costs per unit changes as fewer or more units are produced. Straight-line and

Depreciation is an example of a fixed cost. It does not matter whether the machine is used to produce 1,000 units or 10,000,000 units in a month; the depreciation expense is the same because it is based on the number of years the machine will be in service. Variable costs Variable costs are the costs that change in total each time an additional unit is produced or sold. With a variable cost, the per unit cost stays the same, but the more units produced or sold, the higher the total cost. A direct material is a variable cost. If it takes one yard of fabric at a cost of $5 per yard to make one chair, the total materials cost for one chair is $5. The total cost for 10 chairs is $50 (10 chairs $5 per chair) and the total cost for 100 chairs is $500 (100 chairs $5 per chair).

INTRODUCTION

INRODUCTION OF THE TOPIC LEVERAGE

A company can raise the fund required for investment either by increasing owners claims or the creditors claim or both. The claims of the owners increases when the company raises the fund by issuing equity shares or ploughs back its earnings. The claims of the creditors increase when the funds are raised by borrowings. The various means used to raise the funds represent the financial or the capital structure of the company. The financing or capital structure decision is of tremendous significance for the management, since it influences the debt-equity mix of the company, which ultimately affect shareholders return and risk. In case the borrowed funds are more as compared to the owners funds, it result in increase in shareholders earning together with increase in their risk. This is because the cost of borrowed fund is less than that of shareholders fund on account of the cost of borrowed fund being allowable as a deduction for income tax purpose. But at the same time, the borrowed fund carry a fixed interest, which has to be paid whether the company is earning profit or not. Thus, The risk of the shareholders increase in case there is high proportion of borrowed funds in the total capital structure of the company. In a situation where the proportion of the shareholders fund is more that the proportion of the borrowed fund, the return as well as the risk of shareholders will be much less. MEANING OF LEVERAGES

The dictionary meaning of the term leverage refers to an increased means of accomplishing some purpose. For example, leverages helps us in lifting heavy objects, which may not be otherwise possible. However in the area of finance, the term leverage has special meaning. It is used to describe the firms ability to use fixed cost asset or funds to magnify the return to its owners. James Horne has defined leverage as The employment of an asset or funds on which the firm pays a fixed cost or fixed return. Thus, according to him, leverage is the result of the firm employing an asset or a source of fund which has a fixed cost or return is the fulcrum of leverage. If a firm is not required to pay fixed cost or fixed return, there will be no leverage. Since fixed cost or return has to be paid or incurred irrespective of the volume of output or sales, the size of such cost or return has considerable influence over the amounts of profit available for the shareholders. When the volume of sales changes, leverage helps in quantifying such influence. It may, therefore, be defined as the relative change profit due to change in sales. A high degree of leverage implies that there will be a large change in profit due to relatively small change in sales and vice-versa. Thus, higher the leverage, higher is the risk and higher is the expected return. TYPES OF LEVERAGES Leverages are of three types:
1. Operating leverage 2. Financial leverage 3. Composite leverage/Combined leverage 1. Operating Leverage

Operating leverage may be defined as the tendency of the operating profit to vary disproportionately with sales. It is said o exist when a firm has to pay the fixed cost regardless of volume of output or sales. The firm is said to have a high degree of operating leverage if it employs a greater amount of fixed cost and a smaller amount of variable costs. On the other hand, a firm will have a low operating leverage when it employs a greater amount of variable costs and smaller amount of fixed cost. On the other hand, a firm will have a low operating leverage when it employ a greater amount of variable cost and a smaller amount of fixed costs. Thus, the degree of operating leverage depends upon the amount of fixed element in cost structure. Operating leverage in a firm is a function of the following three factors:
1. The amount of fixed cost 2. The contribution margin 3. The volume of sales

Of course, there will be no operating leverage, if there are no fixed operating costs. The operating leverage can be calculated by following formula: Contribution Operating Leverage = Operating Leverage or OP C

Operating profit here means Earnings before interest & tax (EBIT). Operating leverage may be favorable or unfavorable. In case the contribution (i.e. sales less variable cost) exceeds the fixed cost, there is favorable operating leverage. In a reverse case, the operating leverage will be termed as unfavorable. Degree of Operating Leverage

The degree of operating leverage may be defined as percentage change in the profits resulting from a percentage change in the sales. It may be put in the form of following formula: Percentage change in profit Operating Leverage = Percentage change in sales Utility Operating leverage indicates the impact of change in sales of operating income. If a firm has high degree of operating leverage, small changes in sales will have large effect on operating income, In other words, the operating profit (EBIT) of such a firm will increase at a faster rate than the increase in sales. Similarly the operating profit of such a firm will suffer a greater loss as compared to reduction in its sales. Generally, the firm does not like to operate under condition of high degree of operating leverage. This is a very risky situation Can be excessively damaging to the firms effort to achieve profitability.
2. Financial Leverage

Financial leverage may be defined as the tendency residual net income to very disproportionately with operating profit. It indicates the change that takes place in the taxable income as a change of result in operating income. It signifies the existence of fixed interest /fixed dividend bearing securities in the total capital structure of the company. Thus, the use of fixed interest/dividend bearing securities such as debt & preference capital along with the owners equity in the total capital structure of the company, the fixed interest/dividend bearing securities are greater as compared to the equity capital, the leverage is said to be larger. In a reverse case the leverage will be said to be smaller. Favourable and unfavourable Financial Leverage

Financial leverage may be favourable or unfavourable depending upon whether the earning made by the use of fixed interest or dividendbearing securities exceed or not the explicit fixed cost, the firm has to pay for the employment of such funds. The leverage will be considered to be favourable so long the firm earns more on assets purchased with the fund than the fixed cost of their use. Unfavourable or negative leverage occurs when the firm does not earn much as the fund cost. Computation Computation of Financial leverage can be done according to following methods:
(i) Where capital structure consist of equity shares and debt. In such a case Financial leverage can be calculated a according to the following formula: OP

Operating leverage =
PBT

Where, OP = Operating profit or Earnings before interest & tax(EBIT) PBT = Profit before tax but after interest
(ii) Where the capital structure consist of preference shares and equity shares. The formula for computation of financial leverage can also be applied to a financial plan having preference shares. Of course, the amount of preference dividend will have to be grossed up (as per the tax rate applicable to the company) and deducted from the earnings before interest and tax.

Degree of Financial leverage Degree of financial leverage may be defined as he percentage change in taxable profit as a result of percent change operating profit. This may be put in the form of following equation:

Percentage change in Taxable income Degree of Financial leverage= Percentage change in operating income Alternative definition of Financial Leverage One of the objective of planning an appropriate capital structure is to maximize the return on equity share holders funds or maximize the earning per shares(EPS).Some authorities have used the term Financial Leverage in the context that it defines the relationship between EBIT & EPS. According to Gitman, Financial leverage is The ability of a firm to use fixed financial charges to magnify the effects of changes in EBIT on the firms earnings per share. The financial leverage, therefore, indicate the percentage change in earning per share in relation to a percentage change in EBIT. Percentage change in EPS Degree of Financial leverage= Percentage change in EBIT Utility Financial leverage helps the financial manager considerably while devising the capital structure of the company. A high financial leverage means high fixed financial cost and high financial risk. A Financial manager must plan the capital structure in a way that the firm is in a position to meet its fixed financial costs. Increase in the fixed financial cost requires necessary increase in EBIT level. In the event of failure to do so, the company may be technically forced into liquidation.
3. Composite Leverage

As explained in the preceding pages, operating leverage measures percentage changes in operating profit due to percentage changes in

sales. It explains the degree of operating risk. Financial leverage measures the percentage change in taxable profit (or EPS) on account of percentage change operating profit (i.e., EBIT). Thus, it explains the degree of financial risk. Both these leverages are closely concerned with the firms capacity to meet its fixed costs (both operating & financial). In case both the leverage are combined, the result obtained will disclosed the effect of change in sales over change in taxable profit (or EPS). Composite leverage thus expresses the relationship between revenue on account of sales (i.e., contribution or sales less variable cost) and the taxable income. It helps in findings out the resulting percentage change in taxable income on account of percentage change in sales. This can be computed as follows: Composite Leverage = Operating Leverage * Financial Leverage = (C / OP) * (OP / PBT) = C / PBT Where, C = Contribution (i.e., Sales Variable cost) OP = Operating profit or Earnings before interest & tax PBT = Profit before tax but after Interest SIGNIFICANCE OF LEVERAGE Operating leverage and financial leverage are the two quantitative tools used by the financial expert to measure the returns to the owners (viz., EPS) and the market price of the equity shares. The financial leverage is considered to be the superior of these tools, since it focuses the attention on the market price of the shares which the management always tries to increase by increasing the Net worth of the Firm. The management for this purpose resorts to trading on equity because when there is increase in EBIT then there I corresponding increase in the price of equity shares. However a firm cannot go on indefinitely raising

the debt content in the total capital structure of the company. If a firm goes on employing greater proportion of debt capital, the marginal cost of debt will also go on increasing because the subsequent lenders will demand higher rate of interest. The companys inability to offer the subsequent assets as security will also stand in the way of further employment on debt capital. Moreover, a firm with widely fluctuating cannot afford to employ a high degree of financial leverage. A company should try to have balance of the two leverages because they have got tremendous acceleration deceleration effect on EBIT and EPS. It may be noted that a right combination of these leverages is a very big challenge for the management. A proper combination of both operating & financial leverages is a blessings for firms growth, while an improper combination may prove to be curse. A high degree of operating leverage makes the position of firm very risky. This is because on the one hand on the one hand it is employing excessively assets for which it has to pay fixed cost and at the same time it is using a large amount of debt capital. The fixed cost towards using assets and fixed interest charges bring a greater risk to the firm. In case the earning falls, the firm may not be in a position to meet its fixed cost. Moreover, greater fluctuation in earnings is likely to occur on account of the existence of a high degree of operating leverage. Earnings to the equity share holders will also fluctuate widely on account of existence of a high degree of financial leverage. The existence of a high degree of operating leverage will result in a more than proportionate change in EPS even on account of small changes in EBIT. Thus, a firm has high degree of financial leverage and high degree of operating leverage has to face the problems of inadequate liquidity or insolvency in one or the other year. It does not, however, mean that a firm should opt for low degree of operating & financial leverage. Of course, such lower leverages indicate the caution policy of the

management. But the firm will be losing many profit earnings opportunities. A firm should, therefore, make all possible efforts to combine operating & financial leverage in a way that suits the risk bearing capacity of the firm.
It may be observed that the firm with the high operating leverage should not have a high financial leverage. Similarly, a firm having low operating leverage will stand to gain by having a high financial leverage provided it is enough profitable opportunities for the employment of borrowed fund. However, low operating leverage is considered to be an ideal situation for the maximization of profit with minimum of risk.

COST BEHAVIOR
Cost behavior is the measure of how a cost responds to changes in the level of business activity. Understanding of how costs behave in a particular situation is crucial for decision-making process in an organization. Thus the production performance results reported on the income statement. Cost behavior information allows managers:

To prepare budgets To predict cash flows To plan dividend payments To establish selling prices Depending on the cost behaviors, there are four common cost types,

which are variable, fixed, mixed, and step-variable costs.

Main Features of marginal Costing

1. Marginal costing is technique or working of costing, which is used in conjunction with other method of costing.

2. Fixed & variable cost is kept separate at every stage. Semi-variable cost
is also separated into fixed & variable.

3. As fixed is period cost. They are excluded from product cost or cost of
production or cost of sales. Only variable cost is considered as the cost of the product.

4. When evaluation of finished goods and work-in-progress are taken into

account, they will be only variable cost.

5. As fixed cost is period cost, they are charged to profit and loss account
during the period in which they are incurred. They tar not carried forward to the next years income. 6. Marginal income or marginal contribution known as income or the profit.

7. The difference between the contribution & fixed cost is the net profit or
loss. 8. Fixed cost remains constant irrespective of level of activity.

9. Sales price and variable cost per unit remains the same.
10. Cost-volume-profit relationship is fully employed to revel the state of profitability at various level of activity.

Advantages of cost behavior analysis

1. Constant in nature: - Variable cost fluctuates from time to time, but in the long run, marginal cost is stable. Marginal cost remains the same, irrespective of volume of production. 2. Effective cost control: - It divides cost into fixed & variable. Fixed cost is excluded from product. As such, management can control marginal cost effectively. 3. Treatment of overhead simplified: - It reduces degree of over or under recovery of overhead due to the separation of fixed overhead from production cost.

4. Uniform & realistic valuation: - As fixed overhead cost are excluded from product cost, the valuation of work-in-progress and finished goods become more realistic. 5. Helpful to management: - It enables management to start a new line of production which is advantageous. It is helpful in determining which is profitable whether to buy or manufacture a product. The management can take decision regarding pricing & tendering. 6. Help in production planning: - It shows amount of profit at every level of output with the help of cost volume profit relationship. Here the breakeven chart is made use of. 7. Better result: - When used with standard costing, it gives better result. 8. Fixation of selling price: - The differentiation between cost & variable cost is very helpful in determining the selling price of product or services. Sometimes, different prices are charged for the same article in different market to meet varying degree of competition. 9. Help in budgetary control: - The classification of expenses is very helpful in budgeting and flexible budget for various levels of activities. 10. Preparing tenders: - Many business enterprises have to complete in the market in quoting the lowest price. Total variable cost, when separately calculated, becomes the floor price. Any price above this floor price may be quoted to increase the total contribution. 11.Make or Buy Decision: - Some time a decision has to be made whether to manufacture a component or a product to buy it readymade from the market. The decision to purchase it would to be taken if the price paid recovers some of the fixed expenses.

12. Better presentation: - The statement & graphs prepared under marginal costing are better understood by management executives. The break-even-analysis presents the behavior of cost, sales, contribution etc. in terms of chart & graphs. And, the result can easily be grasped.

Disadvantages of cost behavior analysis

1. Difficulty to analyze overhead: - Separation of cost into fixed & variable is a difficult problem. In marginal costing, semi-variable & semi-fixed cost is not considered. 2. Time element ignored: - Fixed cost and variable costs are different in the short run; but in the long run, all cost are variable. In the long run all cost change at varying level of operation. When new plant & equipment are introduced, fixed cost & variable cost will vary. 3. Unrealistic assumption: - Assumption of the sale price will remain the same at different levels of operation. In real life, they may change & give unrealistic result. 4. Difficulty in fixation of price: - Under marginal costing, selling price is fixed on the basis of contribution. In case of cost plus contract, it is very difficult to fix price. 5. Complete information not given: - It does not explain the reason for increase in production or sale. 6. Significance lost: - In capital-intensive industry, fixed cost occupy major portion in the total cost. But marginal cost only covers variable cost. As such, it loses its significance in capital industry. 7. Problem of variable overhead: - marginal costing overcomes the problem of over and under-absorption of fixed overhead. Yet there is the problem in the case of variable overhead.

8. Sales-oriented: - Successful business has to go in a balanced way in respect of selling production function. But marginal costing is criticized on account of its attaching over-importance to selling function. Thus it is said to be sales-oriented. Production function is given less importance. 9. Unrealistic Stock valuation: - Under marginal costing stock of work in progress & finished stock is valued at variable cost only. No portion of fixed cost is added to the value of stock. Profit, determined, under this method, is depressed. 10. Claim for loss of stock: - Insurance claim for loss or damage of stock on the basis of such a valuation will be unfavorable to business. 11. Automation: - Now-a-days increasing automation is leading to increase in fixed costs. If such increasing fixed cost is ignored, the costing system cannot be effective and dependable. Marginal costing, if applied alone, will not be much in use, unless it is combined with other techniques like standard costing & budgetary control. MARGINAL COSTING In marginal costing, only variable cost is charged to production. The Institute of cost & management accountants (U.K.) defines it as, the practice of charging all cost, both variable & fixed to operation, process or product. This explains why this technique is also called full costing. Administrative, selling & Distribution overhead as much from part of total cost as prime cost & factory burden. Cost-Volume-Profit Analysis As the term itself suggest, the cost-volume-profit (CVP) analysis is the analysis of three variables, viz., cost, volume and profit. In CVP analysis, an attempt is made to measure variation of cost and profit with volume. Profit as variable in the reflection of number of internal and external condition which exert influence on sales revenue and costs.

The CVP analysis helps or assists the management in the profit planning. In order to increase the profit, a concern must increase the output. When the output is at maximum, within the installed capacity, it adds to the contribution. The CVP analysis is relationship among the cost, Volume and profit. When volume of output increases, the fixed cost per unit decreases. Therefore, profit will be more, when sales price remains constant. Generally, cost may not change in direct proportion to the volume. Thus, a small change in the volume will affect the profit. The management is always interesting in knowing that which product or product mix to most profitable, what effect a change in the volume of output will have on cost of production & profit etc. All these problems are solved with the help of CVP analysis. To know the cost volume profit relationship, a study of following is essential. 1. Marginal cost formulae: 2. Breakeven-analysis: 3. Profit volume ratio: Marginal Cost Equations Sales = Variable Cost + Fixed Cost + Profit or Loss Sales Variable cost = Fixed Cost + Profit or Loss Sales Variable cost = Contribution Contribution = Fixed Cost + Profit Contribution Contribution is the difference between sales & marginal cost of sales. Contribution Enables to meet fixed cost and adds to the profit. Contribution is also known as Gross margin. Fixed cost is covered by the contribution; and the balance amount in an addition to the net profit. Marginal Cost = prime cost + Variable Overhead Contribution = Sales Marginal cost Contribution = Sales Variable cost Contribution = Fixed Cost + Profit or Loss Profit = Contribution Fixed cost Sales Variable cost = Fixed Cost + Profit or Loss

(or)

C=SV C=F+P SV=F+P C= Contribution, S= Sales, V= Variable cost, P= Profit, F= Fixed Cost.

Break-Even Analysis The Break-Even point Break-Even chart is two by-product of Break-Even analysis. In a narrow sense, it is concerned with break-even chart. Break-even analysis is also known as CVP analysis. The analysis is a tool of financial analysis whereby impact on profit of changes in volume, price, costs and mix can be estimated with reasonable accuracy. Break-even point is equilibrium point or is a point where the income is exactly equal to expenditure. Break even point. Break-even point is a point where the total sales are equal to total cost. In this point there is no profit or no loss in the volume of sales. The formula to calculate break-even point is:

Total Fixed cost B.E.P. (in unit) = Contribution per unit Total Fixed cost B.E.P. (in sales) = Profit Volume ratio Profit Volume Ratio Profit volume ratio, which is popularly known as P/V ratio; express the relationship of contribution to sales. Another name for this ratio is contribution sales ratio or marginal-income ratio or variable-profit ratio. The ratio, expressed as a percentage, indicate the relative profitability of different product. The formula for computing the P/V ratio is given below: Contribution

P/V Ratio = Sales Or = Sales Or = Sales It can also be expressed in percentage. Normally, this ratio expressed in percentage. When we know the P/V ratio, B.E.P. can be calculated by using the formula Total Fixed cost B.E.P. (in Sales) = Profit Volume ratio (or) P/V ratio F Sales - Variable Cost Fixed Cost + Profit

The profit of a business can be increased by improving P/V ratio. As such management will make effort to improve the ratio. A higher ratio means greater profitability and vice-versa. So management will increase the P/V ratio: (a) (b) (c) By sales price per unit By decreasing variable cost By increasing the production of product which is having high P/V ratio and vice-versa P/V ratio is very important in decision making. It can be used for The calculation of B.P.E. and in problem regarding profit sales relationship. Margin of Safety Margin of Safety is an important concept in marginal costing approach. Total sales minus the sales at break-even point are known as Margin of safety (M/S). That is, margin of safety is the excess of normal or actual sales over sales at B.E.P. In other words, sales over & above break-even sales are known as margin of safety. The Margin of safety refers to the amount by which sales

revenue can fall before a loss is incurred. That is, it is the difference between the actual sales and sales at break-even point. Break-even point can be compared to a Red Signal point. If the margin of safety is large, it is a sign of soundness of the business and vice versa. The margin of safety serves as a guide is a reliable indicator of business strength & soundness. Margin of safety can be expressed in absolute sales amount in percentage. High Margin of safety indicates the soundness of a business because even substantial fall in sale or fall in production, some profit shall be made. Small margin of safety on the other hand is an indicator of weak position of the business and even a small reduction in sale or production will adversely affect the profit position of the business. Margin of safety can be increased by: a) Decreasing the fixed cost b) Decreasing the variable cost c) Increasing the selling price d) Increasing the output & sales e) Changing to a product mix that improve P/V ratio Margin of Safety = Actual Sales Sales at BEP

Profit Or = P/V ratio Profit Or = Contribution FUNCTIONAL AND CONTRIBUTION MARGIN INCOME STATEMENTS Up until now, we have been using the functional, or traditional, or conventional income statement format that you learned in financial

accounting. But managers are better aided in their decision making by a contribution margin or variable costing income statement. A traditional, functional income statement is required for external financial statements. It separates costs by their function: product costs or period costs. Product costs (COGS) are subtracted from sales to show gross margin (gross profit). All period costs (selling, general, and administrative) are then subtracted to show operating income. Sales ` Less Cost of goods sold (including DM, DL, VOH, and FOH) Gross margin Less operating expenses Variable selling, general, and administrative expenses Fixed selling, general, and administrative expenses Net operating income The contribution margin income statement is preferable for management purposes. It separates costs by their behavior: variable costs and fixed costs. It also works very well with CVP analysis. All variable costs, both product and period, are subtracted from sales to show contribution margin. All fixed costs, both fixed overhead (a product cost) and fixed period costs, are then subtracted to show operating income. Fixed overhead is subtracted in total regardless of how many are produced or sold. Sales Less variable cost Variable cost of goods sold (including DM, DL, and VOH) Variable selling, general, and administrative expenses Contribution margin Less fixed costs Fixed overhead Fixed selling, general, and administrative expenses Net operating income If all units produced are also sold, the operating income will be the same regardless of the type of income statement produced.

On the contribution margin income statement, note that everything, including sales, direct materials, direct labor, variable overhead, variable selling/general/administrative, and contribution margin will vary in direct relationship to the number of units sold. The fixed costs, both fixed overhead and fixed selling/general/administrative, remain the same whether we sell any number of units or no units. Well find this concept very helpful when we analyze the relationships among costs, volume, and profit. The way a specific cost reacts to changes in activity levels is called cost behavior. Costs may stay the same or may change proportionately in response to a change in activity. Knowing how a cost reacts to a change in the level of activity makes it easier to create a budget, prepare a forecast, determine how much profit a new product will generate, and determine which of two alternatives should be selected. 1. Variable Cost varies proportionately in total but remains constant on a per unit basis. a. True variable costs proportionately variable (ex. Raw material) amount used directly increases as production increases by the same percentage. b. Step variable costs costs obtainable in large segments (ex. Labor costs of maintenance workers) and that increase or decrease in response to fairly wide changes in activity levels. costs are constant for a certain activity level (relevant range) and then vary in a step like fashion as volume increases. 2. Fixed Costs remain constant in total but vary inversely on a per unit basis (if production increases, then per unit cost decreases; if production decreases, then per unit cost increases) a. Committed fixed costs relate to the investment in plant, equipment and the basic organizational structure of the firm (ex. Depreciation of building and equipment, real estate taxes, insurance, management salaries, etc.) - are long term in nature - cannot be reduced immediately over a short period of time

without seriously impairing either the profitability or the long run goals of a firm. b. Discretionary Fixed Costs (Managed Fixed Costs) - arise from annual decisions by management to spend in certain fixed costs areas (ex. Advertising, research, management development programs) - Short term in nature, usually a single year - Possible to cut back on certain costs for short periods of time with minimum disruptions to long term goals. c. Semi variable or Mixed Costs contains both variable and fixed costs elements - At certain levels of activity mixed costs display the same Characteristics as a fixed cost - At certain levels they display same characteristic as a variable cost - (examples: electricity, heat, telephone, maintenance, car rental, copy machine rental)

INRODUCTION TO COMPANY PROFILE

The VIDARBHA LIQUOR CORPORATION is situated in the Heart of Nagpur City. The company is the member of VIDARBHA INDUSTRIAL ASSOCIATION(VIA).The company is famous across all the vidarbha region as a leading liquor provider. The company is not only providing liquor to the Nagpur District but also the near Districts of the Nagpur. The distribution of company is to Madhya Pradesh also. The company is also deals in the Foreign

Brands .The Manufacturing unit & Administrative office is situated at same location. The Company is influencing most of all on local brands.

INFORMATION OF COMPANY :1. Name of Company

:- M/S. VIDARBH LIQUOR CORPORATION

2. Owner of Company :- 1. Mr. RAMESH JESWANI

2. JAL SALASAR TRADERS PVT. LTD.

3. Address

:- 30/30,NEW COTTON MARKET LAY OUT NEAR S.T. STAND, NAGPUR-440018.

4. Product 5. PAN 6. STATUS 7. TYPE OF FIRM

:- COUNTRY & FOREIGN LIQUOR :- AADFV 8562- H :- REGD. FIRM :- PARTNERSHIP FIRM

SHARES OF PARTNERS PARTNERS Ramesh Jaiswani Jal Salasar Traders Pvt. Ltd. SHARE PERCENTAGE 60% 40%

Following books of accounts are maintained at the company.

 Cash Book Ledgers Book Bank Book Journal The company is using the Mercantile system of Accounting. The valuation of the closing stock is employed at cost or net realizable value whichever is lower.

ADDRESS OF COMPANY Vidarbha Liquor Corporation.

30/30, NEW COTTON MARKET LAY OUT NEAR S.T. STAND, NAGPUR-440018.

AIMS & OBJECTIVES OF STUDY

The objectives of Leverage & cost behavior analysis are as follows: Analysis of Operating, Financial & Combined Leverage. To understand the Degree of Operating, Financial & Combined Leverage.

 To check change in the profit from income statement using the contribution format. To study thy profit volume analysis. To study the Break-Even analysis of company. To understand how the fixed & variable cost behave with respect to the sale & how it is used to predict cost.

HYPOTHESIS OF STUDY
The Hypothesis for cost behavior analysis are as follows :-

 The changes in the level of various revenue and cost arise only because of the changes in the number of product (or service) units produced & sold. Total cost can be divided into a fixed component and a component i.e., variable with respect to the level of output. There is linear relationship between revenue & cost. All revenue and cost can be added and compared without taking into account the time value of money.

LIMITATIONS OF STUDY
The limitations for study are as follows:-

Inventories are valued at variable cost & fixed cost is treated as period
cost. Therefore, closing stock carried over to the next financial year does not contain any component of fixed cost. Inventory would be valued at full cost in reality. The study is limited for two years statement of accounts VIDARBHA LIQUOR CORPORATION. The scope & duration of study is limited.

RESEARCH METHODOLOGY

RESEARCH METHODOLOGY
Research in common parlance refers to a search for knowledge. Research can also be defined as a scientific and system search for pertinent information on specific topic. We can also say research as an art of scientific investigation. In analytical research, the researcher has to use facts or information already available, and analyze these to make a critical evaluation of the material. Descriptive research includes surveys and fact finding enquiries of different kinds. The major purpose of descriptive research is description of the state of affairs, as it exists at present. Other method used is the observational and interactive method which is used to observe the working of the company

Step 1: Research Objectives

To find out the various cost involved in operation of Vidarbha Liquor Corporation. To check that how these cost behave as per the change in the level of production. To analyze the cost-volume-profit. Find out the Break Even Point & Margin of Safety for company. To study the Accounting operation involved in the Organization. Analysis of operating, financial & combined leverage. To understand the degree of operating, financial & combined leverage.

Step 2: Develop the Research Plan

A: Data sources
Primary data :-

The data has been collected by the discussion with the renowned Company guide on successfully relating to company profile & Accounting operation with relation to mine.

Secondary data :-

The data has been collected from the Annual reports of company for 2007-08 & 2008-09. B: Research Approaches
Analytical Research: - It is best suited for Financial Analysis .Uses Fact or information already available and analyzes to make a critical evaluation. Descriptive Research: - Survey & fact finding enquiries, State of affairs as it exists, No control over variables, try to discover cause.

C: Research Instrument Primary data collection instrument: Company Project guides Mr. Yogesh Bangale. Secondary data collection instrument:
Balance Sheet of VIDARBHA LIQUOR CORPORATION Profit & Loss Account of VIDRBHA LIQUOR CORPORATION Internal (company journals, manuals)

Step 3: Collect the Information

Our primaries are collected from personal interview and desk research and the material that we received collected secondary data from other sources.

Step 4: Analyze the Information

Here we tabulate all data and use tables, charts, pie charts and some advance statically techniques to analyze the raw data and convert those data into some meaningful information.

Step 5: Present the Findings

We have presented our analysis in verbal form, tabular form as well as graphical form.

Analysis & Findings of Study

INCOME STATEMENT FOR THE YEAR 20082009

PARTICULARS Sales Less Variable Cost Contribution Less Fixed Cost Net Operating Profit(EBIT) Less Interest Profit Before Tax(PBT) Less Tax Paid Profit after tax or net profit AMOUNT 100940319.00 53237939.58 47702379.42 435869.00 47266510.42 1023137.36 46243373.06 42411.00 46200962.06

Calculation of variable Cost

PARTICULARS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Consumption P. Material Consumption of R. Material Direct expenses Building repairs & maintenance Charity & Donation Conveyance Electricity Employee state insurance Finance charges Generator Fuel & rent Insurance License & other fee expenses Machinery repairs & maintenance Maharashtra state labour welfare fund Miscellaneous expenses N.I.T. Ground rent Postage Printing & stationary Provident fund Repair & maintenance AMOUNT 47624207.10 40126507.40 3265294.00 69711.00 10401.00 874481.00 172812.00 27977.00 99084.00 147855.00 52338.00 2084050.00 56671.00 30000.00 5996.64 20804.00 5906.00 13648.00 153178.00 69187.00

21. 22. 23. 24. 25. 26. 27. 28. 29.

Sample & chemical analysis State Ex. Escort charges State Excise charges Sundry Expenses Telephone expenses Transportation expenses Travelling expenses Vehicle maintenance Weight & Measure Total

109599.00 87469.00 263691.00 266878.66 35455.00 95029.00 155225.00 163674.78 12610.00 53237939.58

Calculation of Fixed Cost

PARTICULARS 1. 2. 3. Advertisement expenses Salary Sales promotion Total AMOUNT 10456.00 413413.00 12000.00 435869.00

Calculation of Total Interest

PARTICULARS 1. 2. 3. 4. Bank Commission Interest & charges Bank Interest Interest Interest on VAT Total AMOUNT 58718.36 862713.00 61079.00 40627.00 1023137.36

Calculation of Tax Paid

PARTICULARS 1. 2. Corporation tax Sales Tax Total AMOUNT 25278.00 17133.00 42411.00

INCOME STATEMENT FOR THE YEAR 20072008

PARTICULARS Sales Less Variable Cost Contribution Less Fixed Cost Net Operating Profit(EBIT) Less Interest Profit Before Tax Less Tax Paid Profit after tax on net profit AMOUNT 71442096.00 66173933.28 5268162.72 319086.00 4949077.72 1400578.00 3548499.72 25534.00 3522965.72

Calculation of variable Cost

PARTICULARS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Consumption of P. material Consumption of R. material Direct Expenses Computer maintenance Electricity Insurance Legal fees License & others Machinery repairs & maintenance Postage Maharashtra state labour welfare fund Printing & stationary Sample & chemical analysis Commission on sale State Excise escort charges AMOUNT 36364088.30 22136758.98 3213217.00 6020.00 102230.00 46324.00 86534.00 1891650.00 9207.00 8470.00 1056.00 60744.00 80670.00 104800.00 94085.00

16. 17. 18. 19. 20. 21. 22. 23. 24. 24. 25. 26. 27. 28. 29. 30. 31.

Travelling Charity & Donations Consultancy expenses Diesel & Oil Transportation Maharashtra Pollution control Loading & unloading expenses Employee state insurance Ganging Expenses NIT ground rent Provident fund Repair & maintenance of building Security charges State Excise charges Sundry expenses Vehicle maintenance Brokerage Total

95216.00 7572.00 84000.00 636268.00 257064.00 4200.00 3670.00 27627.00 10000.00 5526.00 291986.00 17561.00 59204.00 333295.00 48435.00 79605.00 6850.00 66173933.23

Calculation of Fixed Cost

PARTICULARS 1. 2. Advertisement expenses Salary Total AMOUNT 10586.00 308500.00 319086.00

Calculation of Total Interest

PARTICULARS 1. 2. 3. 4. Bank Commission Interest & charges Bank Interest Interest on Tanker loan Interest Total AMOUNT 87053.00 976442.00 80873.00 256210.00 1400578.00

Calculation of Tax Paid

PARTICULARS 1. Corporation tax Total AMOUNT 25534.00 25534.00

Calculation of Operating Leverage

The formula for computing the Operating leverage is given below: Contribution Operating leverage = Operating profit

FOR THE YEAR 2007-2008 2008-2009

CALCULATION 5268162.72/4949077.72 47702379.42/47266510.42

RESULT 1.064 1.009

RESULT :In the year 2007-08 the company is having the Operating Leverage 1.064 & in 2008-09 it is lowered down to 1.009 this is due to behavior of the variable cost with respect to fixed cost.

Calculation of Degree of Operating Leverage

The formula for computing the Degree of Operating leverage is given below: Percentage Change in profit Degree of operating leverage = Percentage Change in sales Percentage change in Operating profit = = [47266510.42 4949077.72] 4949077.72 = 855.06%

Percentage change in Sales = = [100940319.00 71442096.00] 71442096.00 855.06 Degree of operating leverage = 41.29 = 20.71 = 41.29%

RESULT :The Degree of Operating Leverage is lowered down due decrease in operating leverage i.e., 20.71 .

Calculation of Financial Leverage

The formula for computing the Financial leverage is given below: Operating Profit Financial leverage = Profit Before tax

FOR THE YEAR

CALCULATION

RESULT

2007-2008 2008-2009

4949077.72/3548499.72 47266510.42/46243373.06

1.395 1.022

RESULT :In the year 2007-08 the company is having the Operating Leverage 1.395 & in 2008-09 it is lowered down to 1.022 this is due to increase in the fixed cost.

Calculation of Degree of Financial Leverage

The formula for computing the Degree of Operating leverage is given below: Percentage Change in Taxable income Degree of Financial leverage = Percentage Change in Operating income

Percentage change in Taxable income= = [46200963.06-3522965.00] 3522965.00 Percentage change in Operating income = = [47266510.42 4949077.72] 4949077.72 = 855.06% = 1211.42%

1211.42 Degree of operating leverage = 855.06 = 1.42 RESULT :Degree of Financial Leverage is Exists & favourable for the company as it is above one i.e., 1.42 .

Calculation of Combined Leverage

The formula for computing the Combined Leverage is given below: Contribution Combined Leverage =

Profit Before tax

FOR THE YEAR 2007-2008 2008-2009

CALCULATION 5268162.72/3548499.72 47702379.42/46243373.06

RESULT 1.485 1.032

RESULT :In the year 2007-08 the company is having the Combined Leverage 1.485 & in 2008-09 it is lowered down to 1.032 this gives how the risk bearing for the company is lowered down.

Calculation of Profit Volume Ratio

The formula for computing the P/V ratio is given below: Contribution

P/V Ratio = Sales

FOR THE YEAR 2007-2008 2008-2009

CALCULATION 5268162.72/71442096.00 47702379.42/100940319.00

RESULT 0.0737 OR 7.37% 0.4726 OR 47.26%

RESULT :As comparing the PVR of the year 2007-08, it is found that the PVR is highly increased in the year 2008-09 the reason behind this high increase in sales volume.

Calculation of Break-Even-Point (in sales)

The formula for computing the Break-Even Point is given below: Total Fixed cost B.E.P. (in sales) = Profit Volume ratio

FOR THE YEAR 2007-2008 2008-2009

CALCULATION 319086.00/0.0737 435869.00/0.4726

RESULT 4329525.10 922278.88

*Can not calculate BEP in unit as annual production is not available. RESULT :As comparing the BEP of the year 2007-08, it is found that the BEP is decreased in the year 2008-09 These is due to Increase in fixed cost.

Calculation of Margin of Safety

The formula for computing Margin of safety is given below: Margin of Safety = Actual Sales Sales at BEP

FOR THE YEAR 2007-2008 2008-2009

CALCULATION 71442096.00 - 4329525.10 100940319.00 - 922278.88

RESULT 67112570.90 100018040.12

RESULT :As comparing the Margin of safety of the year 2007-08, it is found that the Margin of safety is increased in the year 2008-09 as the sale is increasing.

Profit Percent of Sales

FOR THE YEAR 2007-2008 2008-2009 CALCULATION (3522965.72/71442096.00)*100 (46200962.06/100940319.00)*100 RESULT 4.93% 45.77%

RESULT :As comparing the Profit percentage with sale of the year 2007-08, it is found that the Profit is increased in the year 2008-09 this due to increase in the output.

Conclusion & Recommendations of Study

CONCLUSIONS & RECOMMENDATIONS OF STUDY

From the above study we bring the following conclusions: The Operating leverage of the company is under favaourable condition as the degree of the operating leverage is lowered this defines that the risk of the company is low. As the Degree of operating Leverage is high then the small change in the sales will have large effect on operating income.

The financial leverage of the company is exists as more than one. The
Financial leverage is lowered down therefore the financial risk is also low. Also the company is not earning the interest so the Financially company is under favourable condition. Composite Leverage also at the better position as it is providing good relationship between revenue on account of sale. The output of the production at each level is increasing every year that is the reason behind increase in the profit of every year.

Output growth is more than the increase the fixed cost that is also one
of the reasons for increase in profit every year. Profit Volume Ration of the company is increasing every year increase in profit.

Break-Even Point is act as the Red Signal Point. Break-Even Point of

company is also increasing every year due to o o Increase in the output. Increase in the profit.

Margin of safety of the company is at the good position as it is increasing at every year. All the Cost analysis for company is states that the company is at good position.

The company has greater future prospective for expansion.

Company profitability providing good return to their owners.

 The profit generated by company profit is effectively invested in the company in order to expand business.

SUGGETIONS

TO COMPANY
Suggestions to Company
From the above study we bring the following suggestions:-

The Profit should maintain along with the sale so that the risk
associated to that can be identified. The company should increase the investment. The assets of company should be increased.

The financial stability should be attained so the company should not

have to take loan from others. The company should apply the automated networking structure at mine level that may help to give effective & faster work.

APPENDICES

Manufacturing & Profit & Loss Account for the year ended 2007-08 M/S VIDARBHA LIQUOR CORPORATION
MANUFACTURING TRADING ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2008
PARTICULARS
To Opening stock of finished goods To CONSUMPTION P.MATERIAL Opening stock Add: Purchase Less: Discount Less: Closing stock To CONSUMPTION R. MATERIAL Opening stock Add: Purchase Less: Closing stock To DIRECT EXPENSES Freight/Octroi/Loading Transport & Subsidy Salary & wages Water charges To Gross profit -------------------------Carried Forward

AMOUNT

AMOUNT
0.00

PARTICULARS
By Sales Less: Ex. Duty collected Less: sales tax collected Less: TCS collected Less: Discount Allowed

AMOUNT
228616133.0 0 118038960.0 0 37896209.00 1238868.00 71442096.00

AMOUNT

1413542.62 36335879.1 2 37749421.7 4 9.00 37749412.7 4 1385324.44

71442096.00 36364088.3 0 By Closing stock ---------------------Finished Goods 0.00

597720.00

204617.38 22437903.0 0 22642520.3 8 505761.40 1718033.00 1131500.00 332144.00 31540.00

22136758.9 8

3213217.00 10325751.7 2

TOTALRS.

72039816.0 0

TOTAL RS.

72039816.00

M/S VIDARBHA LIQUOR CORPORATION

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2008
PARTICULARS
To advertisement To Bank Commi. & Int. Charges To comp. maintenance To corporation tax To electricity To Insurance To Interest To legal fees To license & others To machinery repairs & maintenance To postage To Mah. Labour wel.f. To printing & stationary To samp. & chem.. ana To Commi. On sale To state Ex. Escort charges To bank interest To travelling To charity & donation To consultancy exp. To diesel & oil To transportation To Mah. Poll. Cont. To loading/unloading expenses To emp. State insurance a/c To Interest on tanker loan To VAT ganging exp. To NIT ground rent To PF a/c To regional office exp. To repair & maint. To salary a/c To security charges To state Ex. Charges To sundry exp. To vehicle exp. To Brokerage

AMOUNT

AMOUNT
10586.00 87053.40 6020.00 25534.00 102230.00 46324.00 256210.14 86534.00 1891650.00 9207.00 8470.00 1056.00 60744.00 80670.00 104800.00 94085.00 976442.00 95216.00 7572.00 84000.00 636268.00 257064.00 4200.00 3670.00 27627.00 80873.74 10000.00 5526.00 291986.00 0.00 17561.00 308500.00 59204.00 333295.00 48435.09 79605.00 6850.00

PARTICULARS
By Gross Profit ---------------------Brought down By discount on tanker By interest on FDR By sales tax refund

AMOUNT

AMOUNT
10325751.72

To depreciation To Net profit TOTAL RS.

690262.00 3430421.35 10325751.72 TOTAL RS. 10325751.72

Manufacturing & Profit & Loss Account for the year ended 2008-09 M/S VIDARBHA LIQUOR CORPORATION
MANUFACTURING TRADING ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2009
PARTICULARS
To Opening stock of finished goods To CONSUMPTION P.MATERIAL Opening stock Add: Purchase Less: Closing stock To CONSUMPTION R. MATERIAL Opening stock Add: Purchase Less: Closing stock To DIRECT EXPENSES Freight/Octroi/Loading Salary & wages Water charges To Gross profit -------------------------Carried Forward

AMOUNT

AMOUNT
597720.00

PARTICULAR
By Sales Less: Ex. Duty collected Less: sales tax collected Less: TCS collected Scrap sale

AMOUNT
310350333.0 0 156439237.0 0 51446872.00 1669097.00

AMOUNT

1385324.44 49024146.6 6 50409471.1 0 2785264.00

47624207.10

100940319.00 145192.00

505761.40 40502375.0 0 41008136.4 0 881629.00 2918564.00 297406.00 49324.00 TOTAL RS.

40126507.40

By Closing stock ---------------------Finished Goods

677775.00

3265294.00 10004365.50 101618094.0 0 TOTAL RS. 101618094.00

M/S VIDARBHA LIQUOR CORPORATION

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2008
PARTICULARS
To advertisement To Bank Commi. & Int. Charges To Bank Interest To Buil. Repair & maint. To charity & donation To conveyance To corporation tax To electricity To emp. State insurance a/c To Financial charges To generator fuel, rent To insurance To Interest To Interest on VAT To license & others To machinery repairs & maintenance To Mah. Labour wel.f. To Misc. Expenses To NIT ground rent To postage To printing & stationary To PF a/c To repairs & maint. To salary a/c To sales promotion To sales tax To samp. & chem..ana To state Ex. Escort charges To state Ex. Charges To sundry exp. To telephone exp. To transportation

AMOUNT

AMOUNT
10456.00 58718.36 862713.00 69711.00 10401.00 874481.00 25278.00 172810.00 27977.00 99084.52 147855.00 52338.00 61079.00 40627.62 2084050.00

PARTICULARS
By Gross Profit ---------------------Brought down By discount on tanker By interest on FDR By sales tax refund

AMOUNT

AMOUNT
10325751.72

To travelling To vehicle exp. To weight & measure To depreciation To Net profit TOTAL RS. 10325751.72 TOTAL RS. 10325751.72

BIBLIOGRAPHY
BOOKS :-

o Essentials of Management Accounting

o By Dr. P.N. Reddy Corporate Accounting o By K.S. Raman

Management Accounting By R.S.N. Pillai & Bhagawati V.

Research Methodology By V.S. Dessai

o o o o

Annual report of MOIL 2006-07 Corporate Finance of YCMOU Annual report of MOIL 2007-08 Annual report of MOIL 2006-09

WEB-SITES :o o www.google.com www.bing.com

o o o o o

www.wikipedia.com www.moil.org.in www.investopedia.com www.schandgroup.com www.yahooanswers.com