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Number one
Price Strategies: Penetration and Margins
1. Cost Plus 10% margin on cost:
- Total cost consists of cloth, threads and decoration, labor, factory overheads and sales’ expanses.
- Divide the total sum by one hundred add the quotient to the total sum to determine the selling
price per jacket.
2. Variable cost + 20% margin:
- Compute the variable cost (cloth’s cost + threads and decoration’s cost + labor costs).
- To arrive at a selling price per jacket, multiply the variable cost by 120%.
3. Target profit of Rs. 200 per jacket:
- Fixed Cost + Target Profit = Total Fixed Cost.
- Distribute the amount payable against the quantity of the jackets to arrive at the selling price for
each jacket
4. PV Ratio at the target profit price:
- PV Ratio = (Sales price – variable cost) / Sales price
- Determine the PV ratio by dividing the selling price per jacket at the target profit level.
As for pricing at Rs. Up to Rs. 2, 400 per jacket is what people can afford. This is a type of pricing
that has been branded as Penetration pricing and is used in prices below 2500 with an aim of
gaining market share or attracting more buyers.

1. Cost Plus 10% margin on cost:

- Total cost = (2500 reams x Rs, 4000/ream) + Rs. 12, 00,000 + (5000 x Rs. 5000) + Rs. 8, 00,000
+ Rs. 75,000
- 10% of Total Cost
- Selling price = total cost + 10% of a total cost.
2. Variable cost + 20% margin:
- Variable Cost = Rs. (10000 reams * Rs. 4000 per) + 800. Rs. 500 per hour x 5000 hours = 12,
50,000 (+)
- 20% margin on Variable Cost
- Variable cost + 120% or 20 % margin = Selling price.

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3. Target profit of Rs. 200 per jacket:

- Total Cost + Rs. Given a market of 25,000 jackets, what would be the target profit (at 200)?
- TC + Pt = SP
4. PV Ratio at the target profit price:
- PV Ratio = (Sales price – variable cost) / Sales price
Introduction
Indeed, price is a key instrument of any company in defining its market position and profitability.
Penetration pricing and margin-based pricing are two important approaches. This is known as
penetration pricing since at first, a manufacturer can opt to sell its products at lower prices in order
to capture the whole market within a short period of time. In contrast, margin-based pricing
involves calculating the selling price basing upon costs and target profits. The two strategic
approaches have major impacts on competitive markets and customer’s perspectives towards
future profits. It is crucial for companies willing to prosper in turbulent markets to understand
when to implement these processes.
The price strategies that a company chooses can determine its market posture, as well as its overall
profitability. The two principal strategies for dealing with pricing choices in an ever-changing
market environment are called penetration pricing and margin based-pricing.
Concept and application
Penetration Pricing:
Penetration pricing is a dynamic market entry approach that involves lowering the original price
for quicker market penetration. Such technique proves very helpful in relation to new product
launching or joining highly competitive markets. A low starting price acts as a trigger attracting
many customers making the brand known in the market thus setting a foundation upon which to
build other products. Though there are issues in maintaining sustainability of profits over time and
thus one must eventually move to upward pricing as brand loyalty and market share become
stronger.
Margin-Based Pricing:
On the other hand, margin-based pricing is a careful technique that considers costs and desirable
profit margins. It comprises all the cost incurrence elements such as the cost of materials, labor,
overhead, and the targeted profit in each product unit. This way helps in ensuring that all the sales
contribute towards covering both the variable as well as the fixed costs making sure profits will be
sustainable. Quality of a product, brand image and long term viability are some of the important
elements that margin based prices consider.
Application Challenges:

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Penetration pricing is done with a consideration of achieving easy entry into the markets at that
time but can become challenging to maintain profits. Therefore, when and how companies should
gradually move towards higher prices in order to avoid extended periods of operating low margin
operations need to be very well thought out. However, margin-based pricing is not always effective
in highly competent environments with price-sensitive consumers. However, striking the right
balance depends on an appreciation of factors like market dynamics, customer patterns, and
competitive environments.
Finding the Balance:
Successful pricing strategy most frequently uses a mix between penetrative, and margin pricing
methodology. Penetration pricing is a strategic approach that companies use to capture first entry
into the market using attracting lower prices to induce initial customer adoption. Such margin-
based pricing should be timed appropriately so that as brand loyalty grows together with market
leadership it may sustain profitability and ensure financial soundness of such company. Such
transformation enables firms harness already acquired market share with a view of creating
positive sales revenue which includes variable cost, fixed cost plus profit margin.
Essentially, a strategic exchange of penetration and margin based pricing, which can involve
flexibility and anticipation respectively. This entails having profound grasp on industry details
such as consumer perspectives and the existing competitions. The use of penetration and margin
based pricing helps business traverse the difficulties associated with the market, generate high
income and establish lasting brand values. The hallmark for such pricing strategies for standing
the test of time is in this intricate balancing.
Conclusion
Moreover, prices determine a company’s market stance and profitability in the end. Fast adoption
of initial customers comes about due to penetration pricing. Nevertheless, it is important that the
transition to margin based pricing is smooth if profits are to be maintained. These strategic
alliances are highly dynamic; depending on competitive nature of the industry, how consumers
behave and the company’s long-term objectives. Judicial penetration as well as margin-based
pricing are some strategies businesses apply to deal with complex markets that maximize revenue
and build brand value.

Number two
In traditional costing, overheads are usually allocated using only one allocation basis, example.
labour hours or machine hours. ABC (Activity-Based Costing) allocates
Traditional Costing:
1. Calculate Overhead Rate:
Total labor hours / Total overhead costs = Overhead rate

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2. Allocate Overhead to Each Product:

Overhead cost per unit = overhead rate x labor hours per product
3. Calculate Total Cost per Unit:
Total Cost per Unit = Total Costs divided by Total Units Produced
ABC Costing:
1. Identify Activity Costs:
- Production
- Packaging
- Supervision
2. Allocate Activity Costs:
ACTIVITY RATE = COST OF ACTIVITY/TOTAL ACTIVITY UNITS
Determine how much cost it should be allocated to each commodity by multiplying the number of
activity units used in its manufacture.
3. Calculate Total Cost per Unit:
Total cost per unit = direct costs+ allocated activity costs
Note: Labor and machined hours constitute the direct cost.
Traditional Costing:
1. Calculate Overhead Rate:
Therefore, Overhead Rate} = total Overhead Costs/Total Labor Hours. = 1000 Rs per Labor Hour.
2. Allocate Overhead to Each Product:
- (P1) = 250 * 1000 Rs per Labor Hour = Rs 250,000
- => 1000 Rs per Labor hour = 350,000 Rs.
- (P3) (=200 ;{ Labor Hours} times 1000; Rs {Labor Hour} = 200,000 Rs)
- (P4) = 200 x 1000 Rs/Labor Hour = 200,000 Rs.
3. Calculate Total Cost per Unit:
Total Cost per Unit = (Total Costs / Total Units Produced) = 4,175,000/6,000 = Rs 695.83 per unit
ABC Costing:
1. Identify Activity Costs:
- Production: (2,500,000\)

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- Packaging: (600,000\)
- Supervision: 75,000 (Is assumed to have been split on the basis of the unit production).
2. Allocate Activity Costs:
- Calculate Activity Rates:
- Production Rate is calculated as {2,500,000}{6,000} = 416.67, Rs) per unit produced.
- Packaging rate = 600,000/6000 = Rs.100 per unit produced
- Supervision rate of a production unit should not be more than Rs.12.5 per Unit produced by the
production unit.
3. Allocate Activity Costs to Each Product:
- P {1} = 416.67 x 2,500,000 + 100 x 600,000 + 12.5 x 1300 = Rs. 3 916 2
- (P2) = (416.67 \times 600,000+ 100 \times 2000+ 12.5), 3 million = Rs. 5.256 million.
- (P3\): (416.67 \times 2,500,000 + 100 \times 600,000 + 12.5 \times 1,500\) = RS4,
- (P4 = 416.67 \times 2,500,000 + 100 \times 600,000 + 12.5 \times 1200 =\) Rs. 4, 08

4. Calculate Total Cost per Unit:

Total Cost per Unit = Direct Costs + Allocated activity Costs = 4,175,000/6,000 + allocated
activity costs.
Costing Models Comparison
Introduction
Financial management has always been the most important issue among firms. The two primary
models – conventional costing and activity based costing (ABC) employ separate methods of cost
allocation. For this compare, we dig the theory grounds of these two and explore how they apply
in practice and also highlight their weaknesses and strengths.
However, in financial management, choice of a costing model matters most if a firm wants to
understand and distribute costs well. There are two major models in this field Traditional Costing
and ABC (Activity-Based Costing). The aim of this exploration is to look into the theories on
which these models are based as well as their peculiar characteristics. In our exploration of cost
allocation considerations, we explore how such models contribute to prudent financial decision
making in diverse operating environments.
Concept and Application
Conventional Costing is based upon single cost driver like man-hours or machine-hours for
allocation of overhead. It makes calculation easier but can be associated with error, particularly in

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complicated manufacturing situation. Nevertheless, ABC differentiates on various activities which

support overhead incurrence. This mechanism allocates costs according to the consumption
principle and is more suitable for accounting costing of products. ABC in particular has proven to
be important in the manufacturing sector where goods vary or have a complex process of synthesis.
In ABC methodology, it is about finding cost-driving activities, calculating their costs, and
applying them for products under consideration. This process improves on cost visibility and
informs strategy. For example as ABC would be involved in activities such as packing and
supervision in case of the manufacture of lubricants by Priya Industries.
Traditional costing is usually simple and less expensive but it overcosts in situations where
processes are quite different for goods produced. However, ABC provides a thorough appreciation
for cost movements so as to allow organisations to charge fairly and accordingly produce.
Conclusion
However, it is important to note that the decision to go with traditional costing or ABC depends
on how complex the business is. Simple traditional costing is a useful technique for traditional
manufacturing operations, although it proves insufficient for multifaceted, complex scenarios. The
expenses associated with ABC as against that of traditional accounting are more reliable because
they are activity-driven. In the end, however, firms have to balance out between various
alternatives, and select a costing system consistent with their operations and overall company
policies. This transformation from a traditional cost approach to an activity based approach is
critical for any company seeking sustainable financial strategies for today’s competitive
marketplace.

Number Three (a)

To calculate the Budgeted Profit for Company XYZ, we can follow these steps:
1. Calculate the Direct Costs:
- Labor cost per unit; = labor hours per unit x labor cost per hour
- Unit cost of Raw Materials = (Unit Raw Material) * (Cost/kg)
2. Calculate the Total Cost per Unit:
- Labor cost per unit, + total raw material cost per unit.
3. Calculate the Total Revenue:
- For each product, the expression of the total revenue will be as follows: Total Revenue = (Units
produced * Sales Price per unit).
4. Calculate the Gross Profit:
- GP/unit = SP/unit – TC/unit

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- Total Gross Profit = (Gross profit/product unit) x total units produced for each product.
5. Calculate Total Operating Costs:
- Total operational costs=Factory rent, +others overheads
6. Calculate the Budgeted Profit:
- Budgeted profit = total gross profits –total operating costs.
1. Calculate the Direct Costs:
- P:
- Rs. 10 = Rs. 100
- Unit cost of raw material is 6kg at Rs. 25 = Rs. 150
- Q:
- Labor cost per unit = 12 hours X Rs. 10 = Rs. 120
- Raw material cost per unit = 5 kg x Rs. 25 = Rs. 125
- R:
- 8 hours * Rs. Labour cost per unit. 10 = Rs. 80
- Unit cost of raw materials = 10 kg X Rs. 25 = Rs. 250
- S:
- It involves multiplying a labour cost of Rs with a labour time of four hours per unit. 10 = Rs. 40
- Raw Material cost per unit=12kg
25 = Rs. 300
2. Calculate the Total Cost per Unit:
- P: Rs. 100 + Rs. 150 = Rs. 250
- Q: Rs. 120 + Rs. 125 = Rs. 245
- R: Rs. 80 + Rs. 250 = Rs. 330
- S: Rs. 40 + Rs. 300 = Rs. 340
3. Calculate the Total Revenue:
- P: 50 units * Rs. 700 = Rs. 35,000
- Q: 45 units * Rs. 700 = Rs. 31,500
- R: 80 units * Rs. 900 = Rs. 72,000

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- S: 90 units * Rs. 950 = Rs. 85,500

4. Calculate the Gross Profit:
- P: Rs. 700 - Rs. 250 = Rs. 450
- Q: Rs. 700 - Rs. 245 = Rs. 455
- R: Rs. 900 - Rs. 330 = Rs. 570
- S: Rs. 950 - Rs. 340 = Rs. 610
Total Gross Profit = Rs. 450 + Rs. 455 + Rs. 570 + Rs. 610 = Rs. 2085
5. Calculate Total Operating Costs:
- Total Operating Costs = Rs. 1, 00,000 (Factory Rent) + Rs. 20,000 (Other Overheads) = Rs. 1,
20,000
6. Calculate the Budgeted Profit:
- Budgeted Profit = Total Gross Profit – Total Operating Costs.
- Budgeted Profit = Rs. 2,085 - Rs. 1 20,000 = Rs. - 117,915
Rs. profit of Company xyz. - 117, 915.
Introduction:
A very important element in the process of financial planning is Budgeted profit, which helps
companies make the right estimations about income and expenditure costs. This includes
predicting incomes, expenditures, and eventually anticipated profits within several months.
Proactiveness thus provides for the creation of realistic targets by any business in question while
enabling it to make correct decisions.
Concept and Application:
This is all about forecasting revenues and expenditures, including sales prices, production
volumes, and operational costs. Budgeted profit is important in business since it enables matching
of operational activities to financial goals, appropriate allocation of resources and detecting weak
points.
Conclusion:
Budgeted profit hence forms a strategic weapon in imposing fiscal discipline and paves way
towards financial sustainability. The systematic use of strategic management provides
organization with ability to survive in an uncertain business environment by enabling them plan,
budget and make informed decisions.

Number 3 (b)

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a) Contribution per unit (CP):

CP = UPS – VCU.
CP is equal to 50 minus Raw Material, Labour, and Variable Overheads.
b) Profit Volume (PV) Ratio:
P/V ratio = (contribution/sales)*100
(c) Units to be sold to earn a profit of Rs. 70,000:
Number of Units = Fixed costs + desired profit/ contribution per unit.
a) Contribution per unit (CP):
[CP = 50 – (25000+34500+15000)]
CP = 50 – 40,000.
[CP = 10]
b) Profit Volume (PV) Ratio:
The ratio of PV would be 10 divided by 50 and multiplied by one hundred.
PV ratio = 20 percent.
B. The number of products to sell at a profit margin of rupees. 70,000:
400000 + 70000 / 10 = number of units.
The number of units will simply be 47000 divided by 10.
Units = 47,000
Therefore:
CP = Rs. per unit. 10
ii. PV Ratio = 20%.
d) Units to sell in order to make a profit worth Rs. 70,000 = 47,000 units
Introduction:
Financial management is important especially with regards to profitability analysis that helps
business to judge how sustainable they are financially. The contribution margin also referred to as
P-A, is one of the major tools used in this analysis because it identifies the part of the revenue that
goes toward covering the fixed costs and generating profit. This plays an important role in decision
making, allowing companies to ascertain appropriate prices for products, effective selling
strategies, and profitability in general.
Concept:

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Unit cost is the basis of Contribution Margin, which constitutes the proportion that each unit sold
pays for the total variable and fixed costs of an organization. It reflects the additional revenue that
is remaining after deducting the direct costs of a product. This idea demonstrates that a company
must be aware of the actual cost of every product that is sold. Such insight will aid in the decision
making process regarding pricing and production. Companies get transparency about the financial
implication of their operations by breaking down their costs into fixed costs and variable costs so
that they can be managed properly.
Application:
In reality, Contribution Margin is used in different situations in operations. Businesses use this
measure to determine what they should charge for their products and services and so as identify
where break even occurs. For example, high Contribution Margin could imply great pricing policy
or it might even force some cuts on costs in case we have lower profitability. It also helps in
strategic planning where an organization can project how sales variance affects the net income
position.
Conclusion:
Ultimately, the Contribu-tion Margin is an anchor in financial analysis, enabling companies to
steer through complicated economic environments. It is not limited for profits only but has broader
meaning that comprehends cost structures and revenue. Therefore, it is important for financially
resilient businesses to recognize the importance of and learn how to utilize the concept of
contribution margin as a way of achieving long term growth and profits.

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