Strategic Cost Management

September 2023 Examination

Ans 1 :

Introduction

Siya wants to invest Rs a million in the fairness stock marketplace and has 3 corporations in
questioning: A, B, and C. To make an informed choice, we can look at every business
enterprise's funding capacity based on the available data and monetary ratios. we can study
the fee-to-income (P/E) Ratio and income in keeping with percentage (EPS) as essential
ratios. the one's ratios will assist us investigate every enterprise's valuation and profitability,
providing Siya a foundation for her funding selection.

to begin our evaluation, we calculate the P/E ratio via dividing the market rate by way of the
percentage of the income, maintaining with a declaration for every business company.
organization A's P/E ratio is about 214.29, business corporation B's is 228.fifty-seven, and
employer C's is about 380.ninety-five. The decrease P/E ratios for groups A and B compared
to commercial enterprise organisation C imply that a and B's equities are distinctly
undervalued.

Concept and application

sooner or later, we evaluate the EPS, representing the in-step with-percentage profits
generated. employer A has an EPS of 1. 40 rupees, corporation B, has an EPS of one.
Seventy-5 rupees and agency C has the greatest EPS at 2.10 rupees. A better EPS indicates
that the organisation produces greater earnings constant with the proportion, meaning an
additional worthwhile enterprise.

To assist Siya in making an informed funding choice, we will study the furnished records the
use of commonplace monetary ratios: the rate-to-profits (P/E) percentage and earnings
preserving with share (EPS).

Price-to-earnings (P/E) Ratio: The P/E ratio is a normally used valuation ratio that compares
the market price of an inventory to its income in keeping with the percentage. It shows the
price buyers are willing to pay for every unit of an enterprise's profits. Let us determine the P/E
ratio for each firm:

For Business A:
EPS = (Profit before tax - Tax) / Number of Equity Shares EPS = (10,000 - 3,000) / 5,000 =
Rs. 1.40

Company A's P/E Ratio = 300 / 1.40 214.29

 For Firm B: EPS = (15,000 - 4,500) / 6,000 = 1.75 Rupees

 Company B's P/E Ratio = 400 / 1.75 228.57
 For Company C: EPS = (29000 - 8700) / 10,000 = 2.10 Indian Rupees

Company C's P/E Ratio = 800 / 2.10 380.95

In trendy, a lesser P/E ratio indicates that the inventory is undervalued relative to its profits.
both corporation A and business enterprise B have decrease P/E ratios than organisation C.
consequently, primarily based at the P/E ratio, each agency A and agency B might be
advanced investment.

profits consistent with proportion (EPS): EPS assesses the in accordance-to-share profitability
of a enterprise. it's far decided via dividing the organization's internet earnings by using the
number of appropriate shares.

better EPS shows that the organisation's earnings are growing in line with the proportion.
Let’s calculate each company's EPS:

 For Company A: EPS = (10000 - 3000) / 5000 = 1.40 Indian Rupees

 For Firm B: EPS = (15,000 - 4,500) / 6,000 = 1.75 Rupees
 For Company C: EPS = (29000 - 8700) / 10,000 = 2.10 Indian Rupees

Comparing the EPS values reveals That Company C has the highest EPS, indicating
greater per-share profitability.

based at the P/E ratio, groups A and B seem undervalued relative to corporation C. however,
business company C has the greatest profits consistent with percent, indicating a further
income margin. setting cash into company C is probably a further sizable satisfactory in mild
of each ratio. even though the P/E ratio and EPS offer precious insights into the funding
ability of the corporations, an additional whole maintain close is vital earlier than growing a
remaining desire.

The P/E Ratio of organization C can suggest the market's anticipation of its destiny boom and
capability. consumers can be organized to pay a pinnacle elegance for employer C's stock due
to the fact they perceive its improvement opportunities as an extra-large. it's miles vital,
however, to decide whether or no longer the organization's income boom justifies the top
magnificence.
similarly, market situations and enterprise tendencies have to be considered. The future
opportunities of the organizations are determined through mastering the arena in which each
business enterprise operates, identifying ability boom drivers, and gaining a notion of market
dynamics.

Conclusion

After reading the financial ratios, it's far clear that business enterprise C has the highest EPS,
which suggests advanced in-line with-proportion profitability. but, at the same time as the
P/E ratio is taken into consideration, business enterprise A and employer B appearance
undervalued relative to business corporation C. consequently, Siya should spend money on
organization C based on the available facts and financial ratios. before making any funding
selections, it is important to recall that financial ratios provide simplest a partial assessment,
and different factors, which include monetary balance, elevated functionality, enterprise
inclinations, and personal hazard tolerance, need to be taken into consideration.

Ans 2:

Introduction

Megha can utilize CVP (fee-quantity-income) analysis to take a look at the relationships
among a enterprise's charges, quantity, and profits. It aids in determining the breakeven factor
(BEP) and making informed pricing, manufacturing, and profitability alternatives. On this
situation, Megha calculated the BEP for the department the usage of CVP evaluation. The
BEP represents the volume of income or manufacturing at which a business incurs neither a
earnings nor a loss, and it serves as a crucial choice-making benchmark. Megha may be able
to explain that CVP assessment gives a framework for studying the overall performance of
various departments, items, or services furnished thru the company. Managers can find out
regions for development and take the essential corrective steps once they examine real effects
to the thing at which they smash even and to the expected profitability. It makes it viable to
understand better the elements that force profitability and contributes to evaluating the
enterprise's common economic fitness.

Concept and Application

• Breakeven Point Calculation: CVP evaluation lets in managers to decide the

breakeven factor: the minimal degree of profits or manufacturing required to cowl all
charges. This information is essential for making plans and making selections. With the
resource of understanding the breakeven factor, a supervisor can have a look at the viability
of an task, set income goals, determine pricing strategies, and investigate the impact of
charge modifications.
• Assessing Profitability: CVP evaluation helps comprehension of the relationship
among income volume, costs, and earnings. Managers can decide the profitability of
merchandise, services, or enterprise devices by using studying the price shape and
contribution margin (sales from income minus variable fees). This insight allows them to
perceive merchandise or activities with high-income margins and allocate assets hence.

• Pricing Decisions: CVP analysis assists in determining the proper prices for items
and services. Managers should make knowledgeable pricing selections via selecting variable
and stuck costs, supposed income margins, and anticipated sales volumes. CVP evaluation
can help decide the impact of fee modifications on profitability and investigate the
competitiveness of pricing strategies.

• Cost Structure Evaluation: CVP evaluation enables managers to assess the

business's price shape. It differentiates between constant and variable costs and makes one
aware about price optimization opportunities. by analysing charge conduct at numerous
activity ranges, managers ought to make informed selections regarding value control, aid
allocation, and productiveness improvements.

• Analysis of Sensitivity: The CVP method makes it possible for behaviours to take a
look at sensitivity, which includes figuring out how the impact of various factors on monetary
results can be measured. Megha can reveal that by using converting important inputs like
profits extent, variable charges, or constant fees, she can compare the sensitivity of earnings
and the point at which they wreck even. This aids in determining the amount of chance
associated with several situations and contributes to the development of backup plans.

• Planning and Budgeting: The CVP analysis performs a significant part in

planning and budgeting. Megha has to underline the truth that the branch of finance can also
provide budgets that are more accurate and in keeping with expectations by adding CVP
analysis. It allows outline attainable sales goals, effectively allocate assets, and check
whether planned efforts may be financially feasible. The insights that may be gleaned from
CVP evaluation can improve the accuracy of monetary projections and help make strategic
choices.

• Support for Decision-Making: CVP assessment gives precious data that can be
integrated into diverse choice-making strategies. Megha also can emphasize that it enables
decide whether or no longer or no longer new product launches, business enterprise
expansions, or investment potentialities are financially possible. Managers should make
appropriately informed alternatives, observe threat-reward alternate-offs, and prioritize
funding opportunities once they quantify the effect of preference on charges, sales, and
profits. CVP assessment facilitates bringing monetary dreams and operational plans into
alignment.

Megha may also explain why CVP analysis is a tool that would efficaciously carry financial
records to investors and different stakeholders. The control of a business enterprise may
additionally create self-warranty in traders approximately the monetary health of the
organization in addition to the development capacity of the organisation through showing a
whole draw close of the price shape, breakeven factor, and profitability drivers of the
enterprise. An in-intensity examination of the CVP gives a stable basis for financial talks and
shows.

Megha can emphasize the all-encompassing person of CVP analysis and its many useful
repercussions by way of presenting these supplementary factors. now not simplest does it a
helpful aid in identifying the stop at which the corporation might be worthwhile and it
enables making plans, budgeting, selection-making, overall performance assessment, and
communicating with customers.

Conclusion

CVP analysis lets in managers to carry out "what-if" analyses and state-of-affairs planning.
Managers can simulate the impact on profitability through manipulating sales quantity, fees,
and costs and making extra suitable, knowledgeable selections. This permits the assessment
of the dangers and benefits associated with numerous industrial business enterprise situations.
by using emphasizing these advantages, Megha can persuade her supervisor that CVP
evaluation is valuable for monetary planning, desire-making, and performance assessment. It
affords critical insights into the corporation's economic dynamics, allows optimized
profitability, and enables proactive cost and revenue control. Megha can show its wholesome
worth to the organization with the aid of maximizing its profitability, controlling its prices,
and the usage of sustainable improvement thanks to incorporating CVP evaluation into the
agency's monetary control practices.

Ans 3a:

Introduction

Managers can assess the effect on overall costs, margins, and breakeven factors by thinking
of the incremental cost. It aids in figuring out if the greater raw cloth buy is financially
feasible and if the expected sales from the brand new product or extended manufacturing is
sufficient to justify the charge.

Concept and Application

i) Incremental cost of production for acquiring raw materials: relevant cost.

The incremental production fee for acquiring simple materials is pertinent to selection-
making. This price represents the more expenditure incurred to build up easy substances for
generating a brand-new product or an increase in manufacturing stages. it is applicable as it
directly influences the decision's profitability and practicability.

ii) Book Value of the Production Machinery: Irrelevant expense.

production equipment's e-book cost is generally seen as an inappropriate price even as
making picks. The eBook rate is the ancient price of the device minus the accumulated
depreciation.

iii) Revenue anticipated from the product's sale that must be sacrificed to produce the
new product: relevant cost.

applicable expenses include the expected sales from the product's deal at the way to be
sacrificed to provide the logo-new product. This price represents the opportunity value of
utilizing resources (e.g., manufacturing capability, fundamental materials) to make the new
product in place of the extant product.

iv) Rent paid for the current factory location: Irrelevant expense.

usually, the rent paid for the extant manufacturing facility premises is deemed irrelevant for
selection-making. This rate is a set administrative fee that does not change, no matter the
choice made. due to the fact the lease is a non-negotiable cost, it is miles unaffected through
the selection resource and must no longer influence the choice-making gadget. payments that
do not exchange based totally at the opportunity publications of movement under attention
are beside the point.

v) Depreciation: Irrelevant Cost.

Depreciation is commonly seemed as a cost this is irrelevant for selection-making functions.

Depreciation allocates an asset's rate over its helpful lifestyles and does not bring about a
cash outflow. As a noncash price, depreciation not influences the selection's coins flows or
destiny fees and advantages. consequently, whilst making picks, managers should prioritize
coin glide and charges that have a right away bearing on the profitability and viability of the
preferences beneath hobby.

Conclusion

It’s vital to take into account that the relevance or irrelevance of charges can vary primarily
based totally on the particular context and nature of the selection. To make certain accurate
preference-making, a whole evaluation of the prices and their impact on the selection has to
be conducted.
Ans 3b:

Introduction:

The supplied stability sheet illustrates a employer's economic popularity as of March 31,
2022. The to-be had data requires us to calculate the Debt fairness Ratio, gift-day Ratio, and
short Ratio. due to the absence of values for modern liabilities, we are able to most effective
estimate the debt-to-fairness Ratio. The assessment makes a speciality of the enterprise's
leverage, economic shape, and prospective liquidity.

Concept and Application

To compute the Debt Equity Ratio, Current Ratio, and Quick Ratio for the year ending
31.3.2022 from the provided balance sheet, we must collect the pertinent data.

Equity to Debt Ratio:

The Debt-to-Equity Ratio equals Total Debt / Total Equity.

In this instance, "Total Debt" is equivalent to "Borrowings" on the balance sheet.

42059 Total Debt = Borrowings

Total Equity = Shareholder Equity = 2,000,000

Equity to Debt Ratio = 42059 / 2000000 0.0021

Existing Ratio:

The current Ratio equals Current Assets divided by Current Liabilities.

According to the balance sheet, the value of Current Assets is $1,217,86.

Total Liabilities must be subtracted from Noncurrent Liabilities to determine Current

Liabilities.

Borrowings equal 42059 Noncurrent Liabilities.

In the balance statement, total liabilities are not listed explicitly. Nevertheless, we can infer
that Total Liabilities equal the sum of Noncurrent and Current Liabilities.
Total Obligations = Noncurrent Obligations plus Current Obligations

Total Liabilities - Noncurrent Liabilities = Current Liabilities.

Current Liabilities = Total Obligations - Noncurrent Obligations

To calculate Current Liabilities, we require the 2022 value of Total Liabilities. However, it
needs to be mentioned explicitly in the balance sheet. With this information, the Current
Ratio can be calculated.

Quick Ratio:

Current Assets - Inventory = Current Assets / Current Liabilities

We know the value of Current Assets (122107.86) and Inventories (313251) from the balance
sheet. However, as stated previously, we lack the value of Current Liabilities. With this
information, the Quick Ratio can be calculated.

Findings:

alas, the current cutting Ratio and quick Ratio cannot be calculated except the values of
cutting-edge reducing Liabilities. although we may additionally want to determine the Debt-
to-equity Ratio, it is ready 0.0021. This indicates a meagre debt-to-fairness ratio. It indicates
that the business enterprise's financial shape is conservative and intently depending on equity
financing.

For a complete evaluation of the business enterprise's financial health and liquidity, having
whole information on liabilities is critical. The cutting-cutting modern slicing Ratio and brief
Ratio are liquidity ratios which are treasured sources in evaluating an organization's
capability to fulfil its quick-term duties. except for the one’s ratios, comparing the business
organisation's liquidity characteristic comprehensively may be smoother, primarily based on
the information provided.

Conclusion

at the identical time as we may also want to calculate the Debt equity Ratio the use of the to-
be-had records, we need extra explicit values for cutting-edge liabilities to calculate the
present-day Ratio and brief Ratio. consequently, my provided facts can't very well examine
the corporation's liquidity and quick-time solvency.