Strategic Cost Management Dec 2024

Description

 

Strategic Cost Management

December 2024 Examination

 

 

1. A leading business school is planning to launch a new post-graduate course in Data Science and Analytics. The course is designed to cater to the growing demand for skilled professionals in this field. The school’s administration is tasked with determining the optimal pricing strategy for the course.

The school has conducted market research to understand the demand for the course and the pricing sensitivity of potential students. The research indicates that there is a strong demand for the course, and students are willing to pay a premium for a high-quality education from a reputable institution. However, students are also price-conscious, and the school needs to balance the demand for the course with the need to generate revenue.

The school’s administration is considering two pricing methods: cost-plus pricing and break-even pricing. Explain the advantages and disadvantages of cost-plus pricing and break-even pricing in the context of this situation.  (10 marks)

Ans 1.

Introduction

In today’s competitive educational landscape, pricing strategies play a crucial role in attracting students while ensuring profitability for institutions. A leading business school plans to launch a post-graduate course in Data Science and Analytics, catering to the increasing demand for data science professionals. The administration’s challenge is to select the most appropriate pricing strategy to balance student demand with the institution’s revenue objectives. Based on market research, students are willing to pay a premium for a high-quality course but remain price-

 

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2. The management of a retail company, “The Retail Haven,” carries a notion that it has been experiencing declining profits despite a steady increase in sales. The company’s management is concerned about the company’s financial health and has tasked you with conducting a ratio analysis to identify potential areas of concern

Particulars	Year 1	Year 2
Sales	₹1,00,000	₹1,20,000
Cost of Goods Sold	₹70,000	₹80,000
Gross Profit	₹30,000	₹40,000
Operating Expenses	₹20,000	₹25,000
Operating Income	₹10,000	₹15,000
Interest Expense	₹2,000	₹2,500
Net Income	₹8,000	₹12,500
Total Assets	₹50,000	₹60,000
Total Liabilities	₹20,000	₹25,000
Shareholders’ Equity	₹30,000	₹35,000

 

 

1. a) You’re required to calculate the following financial ratios for both years:
2. Gross Profit Margin Ratio
3. Net Profit Margin Ratio

iii. Return on Assets Ratio (ignore taking average for balance sheet number)

1. Return on Equity Ratio (ignore taking average for balance sheet number)
2. b) Analyze the trends in these ratios and comment if the management is correct. (10 marks)

Ans 2.

Introduction

In financial analysis, ratio analysis is an essential tool used to assess a company’s financial health by evaluating relationships between various financial statement items. For “The Retail Haven,” the management has noticed a paradox: while sales have been increasing, profits have been declining. To better understand the reasons behind this, the management has asked for a detailed analysis of key financial ratios. These ratios—Gross Profit Margin, Net Profit Margin, Return on Assets (ROA), and Return on Equity (ROE)—will provide insights into the company’s profitability, operational efficiency, and financial performance over the two years. By examining these

 

3. August Ltd. is a medium-sized enterprise operating in the consumer electronics industry. The company has been in business for several years and has a reputation for producing high-quality products. However, the company has been facing increasing competition from both domestic and international rivals. To maintain its market position and drive growth, the company is considering launching a new product.

The new product is a cutting-edge gadget that is expected to appeal to a wide range of consumers. The company believes that the product has the potential to become a major success and significantly boost its revenue and profitability. However, before launching the product, the company needs to conduct a thorough analysis to assess its financial viability and potential risks. It is considering launching a new product. The estimated fixed costs for the product are ₹1,000,000 per year, and the variable cost per unit is ₹50. The expected selling price per unit is ₹100.

1. a) Calculate the break-even point in units and in rupees for the new product. If the company expects to sell 20,000 units of the product per year, what will be its profit or loss? (5 marks)

Ans 3a.

Introduction

In competitive industries like consumer electronics, launching a new product requires careful financial analysis to ensure its viability. One key financial tool for this analysis is the break-even point (BEP), which helps companies determine how many units of a product they need to sell to cover all their fixed and variable costs. For August Ltd., which is planning to launch a new gadget, understanding the break-even point will allow the company to assess the risk and profitability of the product before

 

1. b) Calculate the margin of safety in units and in rupees for the new product, assuming expected sales of 20,000 units per year. What does the margin of safety indicate about the product’s profitability? (5 marks)

Ans 3b.

Introduction

August Ltd., a medium-sized enterprise in the consumer electronics industry, is considering launching a new cutting-edge gadget to stay competitive amidst increasing rivalry. The product is expected to boost the company’s revenue and profitability. Before moving forward, the company needs to evaluate the financial feasibility of the product. A key aspect of this analysis is determining the margin of safety, which provides insight into how much sales can drop before the company