CE 3 – Case Study

Name of the Student – Kapil Yadav

Roll No. – C-26
Q1. Applying the principles of cost identify the minimum price that Mr. Shah should
have set to ensure that there is a breakeven despite giving discount.
Ans. Lets assume fixed cost to be 10 crores and if we consider gross profit margin of Cipla as
industry standard which is 22.20% to calculate breakeven point, we will get an over view of
minimum sales which “Shree Medical Shop” has to achieve in revenue to cover its fixed cost
and variable cost.
¿ Cost
Breakeven=
Gross Margin Profit
10 Cr .
Breakeven=
.22
Breakeven = 45.45 Cr.
That means “Shree Medical Shop” has to sale ₹45.45 worth of medicine to cover its fixed
cost as well as variable cost.
Let’s assume MRP per unit is ₹1000 and taking 22.20% as discount allowed on MRP will get
minimum price for which we could sell medicine.
1000
¿
1.22
= ₹819.67
Minimum price on which we could sell per unit is ₹819.67, which is plenty margin to use in
comparison of MRP ₹1000, even if we allow 10% of discount on MRP will remain in profit.
Q2. Utilizing the principles of cost identify the reason why Mr. Shah is worried despite
having such high profits.
Ans. There are three stages of law of diminishing margin.
Stage-1
It increases at an increasing rate- that means at commencement of a business its sales increase
with and increasing rate where with less input output is higher.
Stage- 2
It increases at decreasing rate- that means with every additional input there is positive output
but compared to stage- 1 it is less.
Stage- 3
It decreases at decreasing rate- that means with every additional input there is negative
output.
Number of laborers Output Marginal product
0 0 -
1 5 5
2 15 10
3 20 5
4 22 2
5 22 0
6 18 -4

As you can see through above table with every additional labor output is increasing at
increasing rate till labor number 2, after that it starts to increase at decreasing rate till labor
number 5, and it become negative when 6th labor is introduced.
With early breakeven in 30 months and diversifying his portfolio by adding surgical
equipment, patented drugs and purchasing of next-door shop Mr. Shah has to employ new
labors or store attends to handle more customers and in addition he has incurred more fixed
cost as salary to those employees and maintains of additional shop.
Q3. Analyze the situation faced by Mr. Shah and using the principles of cost provide
some solution to Mr. Shah.
Ans. He had to withdraw out of the M. Pharma program he was enrolled in at the time due to
the tragic loss of his father, which forced him to look for other ways to make money as he
now had to take care of his family. The premium he would receive from the corporation,
which would be worth $50,000, was his only asset. He used that money to launch his own
pharmacy-related company. The decision to forego his M. Pharma studies in favor of starting
his own business, which was the next best option, is referred to as an "opportunity cost." Mr.
Shah's issue can be resolved by saying that he should have pursued an M. Pharma degree to
further his education and become a trained pharmacist.
The following situation Mr. Shah encountered was when he was concerned despite making
such significant profits and believed that moving forward wouldn't be an easy task due to the
non-linear breakeven analysis. He had already crossed his breakeven in just 30 months after
the start of his business and had now reached that point where he had earned the most profit,
which indicates that in the future he will be earning profit but at a decreasing rate, leading
him to the point where he was concerned. The answer to this issue is that he shouldn't worry
about the second breakeven point because he can influence it by growing his company
through new initiatives and innovation, lowering its fixed costs, and managing its variable
costs. He should only concentrate on maximizing profit by cutting costs.