STRATEGIC COST MANAGEMENT

Answer 1
Amount Price per Unit
Sales 1000000 100
Less variable cost 250000 25
contribution 750000 75
Less : fixed cost 600000 60
Earning before interest 150000 15
and tax

(A) Contribution = sales – variable cost

= 1000000 – 250000
Contribution = Rs 750000
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
(B) PV Ratio = × 100
𝑠𝑎𝑙𝑒𝑠
750000
= 100000 × 100

PV Ratio = 75%

𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
(C) Break even ratio (in units) = 𝑠𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

600000 600000
= =
100−25 75

= 8000 units
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
Break even ratio (in value) = 𝑝𝑣 𝑟𝑎𝑡𝑖𝑜

600000
= 0.75

= Rs 800000

(D) Margin of Safety

𝑠𝑎𝑙𝑒𝑠−𝑏𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑣𝑎𝑙𝑢𝑒
MOS = × 100
𝑠𝑎𝑙𝑒𝑠
1000000−800000
MOS = ×100
1000000

MOS = 20%
(E) Number of pens to be sold to get profit of Rs 20000
Sales 826667 100
Less variable cost 206667 25
contribution 620000 75
Less : fixed cost 600000 60

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 Earning before interest 20000 15
and tax

Profits = contribution – fixed cost

20000 = contribution – 600000
Contribution = 620000
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
PV Ratio = × 100
𝑠𝑎𝑙𝑒𝑠
620000
75% = × 100
𝑠𝑎𝑙𝑒𝑠

Sales = Rs 826667
𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒
Sales in units = 𝑠𝑎𝑙𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
826667
Sales = 100

Sales = 8267 units

Pen making business should sell 8267 units if pens to earn profit of Rs 20000

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Answer 2
Ratio analysis
Current ratio
The current ratio measures the ability of an organization to pay its bills in the near-
term. It is a common measure of the short-term liquidity of a business. The ratio is
used by analysts to determine whether they should invest in or lend money to a
business. To calculate the current ratio, divide the total of all current assets by the total
of all current liabilities
Current ratio = Current assets ÷ Current liabilities
Inventory turnover ratio
The inventory turnover ratio, also known as the stock turnover ratio, is an efficiency
ratio that measures how efficiently inventory is managed. The inventory turnover ratio
formula is equal to the cost of goods sold divided by total or average inventory to show
how many times inventory is “turned” or sold during a period. The ratio can be used to
determine if there are excessive inventory levels compared to sales.
Inventory turnover ratio = cost of goods sold ÷ Average Inventory

Assets turnover ratio

The asset turnover ratio is an efficiency ratio that measures and helps analyse a
company’s ability to generate sales from its assets by comparing net sales with
average total assets. To simply put it, this ratio shows how efficiently a company can
use its assets to generate sales.
The total asset turnover ratio calculates net sales as a percentage of assets to show
how many sales are generated from each penny of company assets.
Assets turnover ratio = net sales ÷ average total assets

Debt equity ratio

The debt-to-equity ratio or D/E ratio is an important metric in finance that measures
the financial leverage of a company and evaluates the extent to which it can cover its
debt. It is calculated by dividing the total liabilities by the shareholder equity of the
company.
It shows the proportion to which a company is able to finance its operations via debt
rather than its own resources. It is also a long-term risk assessment of the capital
structure of a company and provides insight over time into its growth strategy.
A high D/E ratio suggests that the company is sourcing more of its business operations
by borrowing money, which may subject the company to potential risks if debt levels
are too high

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Debt/ equity ratio = Debt ÷ equity

Dividend Pay-out Ratio

The Dividend Payout Ratio is the proportion of a company’s net income that is paid
out as dividends as a form of compensation for common and preferred shareholders.
Typically expressed as a percentage, the dividend payout ratio depicts how much of
a company’s earnings are paid out to shareholders as opposed to being retained and
re-invested into operations – which has significant implications on the type of investors
that are attracted to the stock.
Dividend Pay-out Ratio = Dividend per share ÷ earning per share
Ratios of HUL limited for the year ended 31st march 2022
ratios Comment
Current ratio 1.38 Current ratio is grater
then 1 it mean HUL
limited is capable to
paying its short term
obligations
Inventory turnover ratio 4.25 Inventory turnover
indicate that restock
rates and sales are
balanced
Asset turnover ratio 0.74 it's not good for the
company as the total
assets cannot produce
enough revenue at the
end of the year
Debt Equity ratio 0.10 Its shows that company
have more equity fund
then debt funds
Dividend pay out ratio 75.41 A low payout ratio can
signal that a company is
reinvesting the bulk of its
earnings into expanding
operations

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Answer 3 (A)
Product mix
Product mix or product assortment refers to the number of product lines that an
organization offers to its customers. A product line is a group of related products
manufactured or marketed by a single company. Such products function in a similar
manner, sold to the same customer group, sold through the same type of outlets, and
fall within the same price range.
Product mix consists of various product lines that an organization offers, an
organization may have just one product line in its product mix and it may also have
multiple product lines. These product lines may be fairly similar or totally different,
The following considerations are needed for deciding about product mix :
1. An analysis of the constraints in producing different products.
2. Analysis of the expected demand for different products.
3. Measurement of the contribution margin per unit for each product.
4. Effect on fixed costs if the mix is changed.
5. Effect on maximization of profits of the firm-an inter-comparison of products.
6. Whether there is a change in fixed cost due to change in product mix.
The Decision Rule
1. If the priority is to produce more, the product provides highest contribution.
2. If the product is produced least in quantity, it will have the least contribution.
3. If the production is stopped, it has negative contribution.
Examples of product mix
This can be further explained through the following simple example. A firm, Royal
Dressers, is engaged in manufacturing shirts and jeans, and it can sell all the shirts
and pants it produces. On its full capacity, the firm may work only for 2,000 machine
hours, which becomes a constraint. It uses same machines to produce both pants and
shirts. On analyzing the following, we can decide as which product should be produced
more.
ANALYSIS OF PRODUCT MIX
Amount ( Rs ) Amount ( Rs )
Cost revenue Shirts Jeans
Selling price 3000 6000
Less variable cost 1200 4800
Contribution margin 1800 1200
Shirt (1800/3000)*100 60%
Jeans (1200/6000) 20%

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Remember, if we consider only the contribution margin analysis, we can decide that
shirts should be produced more because the higher the profit- volume ratio, also
known as contribution margin ratio, the higher will be the profits of the firm.
However,this analysis will not be complete if we ignore the time factor, that is, machine
hours utilized in producing jeans and shirts.

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ANSWER 3 (B)
Cost of product :
Direct Material 20
Direct labour 10
Power cost 5
Rent 18
Depreciation on plant 6
Total cost 59

The accountant is correct Sanjay is the owner of SSR Pvt. Ltd should not produce
product A in house rather he should but Product A at the rate of Rs 50.
If SSR Pvt limited produced product A within the Premises It would cost Rs 59 per
piece
And I SSR Private limited buy Product A form outside it would cost Rs 50 piece

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