Strategic Cost Management June 2024

Description

Strategic Cost Management

June 2024 Examination

 

 

1)   With the given information calculate the following for the year ended March 2023:

1. a) Current Ratio b) D/E Ratio
2. c) Interest Coverage Ratio
3. d) COGS Ratio
4. e) Return on Assets

Comment on the value in terms of its adequacy (whether it is sufficient / good or not). Values may be rounded off to 2 decimal places.    (10 marks)

Standalone Profit & Loss account		in Rs. Cr. –
		Mar. 23		Mar. 22
	INCOME
Revenue From Operations		83,251		56,336
Other Operating Revenues		1,709		1,110
Total Operating Revenues		84,960		57,446
Other Income		2,545		2,076
Total Revenue		87,505		59,522
EXPENSES
Cost Of Materials Consumed		62,226		40,506
Purchase Of Stock-In Trade		3,407		2,375
Changes In Inventories Of FG,WIP And Stock-In Trade		(1,075)		(539)
Other Expenses		739		204
Cost of Goods Sold		65,297		42,546
Employee Benefit Expenses		3,650		3,306
Finance Costs		273		223
Depreciation And Amortisation Expenses		3,154		2,451
Other Expenses		7,001		4,761
Total Expenses		79,375		53,287
Profit/Loss Before Tax		8,131		6,235
Total Tax Expenses		1,582		1,300
Profit/Loss For The Period		6,549		4,935

 

All expenses may be assumed to be operating expenses.

Standalone Balance Sheet	in Rs. Cr.
	Mar. 23	Mar. 22
SHAREHOLDER’S FUNDS
Equity Share Capital	599	598
Reserves and Surplus	42,757	38,362
Total Shareholders Funds	43,357	38,961
NON-CURRENT LIABILITIES
Long Term Borrowings	2,332	5,678
Other Long Term Liabilities incl. Deferred Tax	2,844	2,758
Long Term Provisions	1,207	913
Total Non-Current Liabilities	6,383	9,349
CURRENT LIABILITIES
Short Term Borrowings	2,312	812
Trade Payables	17,146	12,894
Other Current Liabilities	5,975	4,661
Short Term Provisions	607	454
Total Current Liabilities	26,040	18,820
Total Capital And Liabilities	75,780	67,130
ASSETS
NON-CURRENT ASSETS
Tangible Assets	13,050	12,004
Intangible Assets	3,926	2,544
Capital Work-In-Progress	950	1,522
Intangible Assets Under Development	1,834	3,497
Fixed Assets	19,761	19,567
Non-Current Investments	17,539	17,208
Long Term Loans And Advances	177	960
Other Non-Current Assets	3,659	3,478
Total Non-Current Assets	41,136	41,213
CURRENT ASSETS
Current Investments	9,548	7,902
Inventories	8,881	5,883
Trade Receivables	4,042	3,035
Cash And Cash Equivalents	4,482	3,651
Short Term Loans And Advances	2,177	1,846
Other Current Assets	5,514	3,602
Total Current Assets	34,644	25,918
Total Assets	75,780	67,130

 

Ans 1.

Introduction

Strategic cost management is an essential aspect for businesses aiming to optimize their performance by managing costs effectively while still achieving their strategic goals. The case study presented involves a detailed analysis of the financial statements for the year ending March 2023, focusing on key financial ratios that shed light on the company’s operational efficiency, financial stability, and profitability. This analysis includes calculating the current ratio, debt-to-equity (D/E) ratio, interest coverage ratio, cost of goods sold (COGS) ratio, and return on assets (ROA). These ratios not only help in understanding the company’s financial health but also provide insights into its strategic positioning in the competitive market. Evaluating these financial indicators will allow us to comment on their

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2. Following is the Operating Statement of Vayu Pvt. Ltd. for March 2023.

	Rs.
Sales (20,000 units @ Rs. 80 each)	16,00,000
Operating Costs:
Raw Materials	600,000
Labour Costs	400,000
Manufacturing Overheads (Variable)	200,000
Overheads (Fixed)	150,000

 

1. a) Calculate existing Profitability.
2. b) Find out the following:
3. Contribution Value and Per unit
4. PV Ratio

iii. Break Even Sales Units & value

1. c) The firm receives an order of manufacturing 20,000 more units and supplying them at the rate of Rs. 50 each. As the Finance Manager advise the firm whether to accept or reject the order (Use CVP analysis only). Assume that the firm has adequate capacity to manufacture the additional units.    (10 marks)

Ans 2.

Introduction

Vayu Pvt. Ltd., a manufacturing firm, presents an opportunity to evaluate its financial performance and strategic decisions through its March 2023 operating statement. This analysis will focus on understanding the company’s profitability, operational efficiency, and decision-making regarding potential new orders. By delving into key financial metrics such as profitability, contribution margin, profit-volume (PV) ratio, and break-even points, we can gain insights into the company’s cost structure and pricing strategy. Additionally, a critical examination using Cost-Volume-Profit (CVP) analysis will be conducted to ascertain whether accepting a substantial new order at a reduced price is financially viable. This assessment is crucial for strategic planning and ensuring long-term sustainability in a competitive market

 

 

3a. Sridevi  is  looking  at  investment  opportunities  for  its  2  departments.  The  risk involved in both is different and hence, so is the cost of funding the project. The current return for both departments is an average of 10%. As per the initial assessments done, the details are as follows:

	Dept. A	Dept. B
	Rs. Crores
Capital Investment	200	200
Projected Returns	22	24

 

Advise Sridevi on whether to accept the proposals using:

(i)  ROI approach

(ii) Residual Income approach if Cost of funding the investment is 10% and 14% respectively.   (5 marks)

Ans 1.

Introduction

When evaluating investment opportunities for its two departments, Sridevi must consider the different risks and associated costs of funding. Given that both departments currently yield an average return of 10%, a thorough analysis using both the Return on Investment (ROI) and Residual Income (RI) approaches will provide insight into the viability of the proposed investments. Each

 

1. Agarwal & Sons. Produces 3 different products X,Y and Z. The production is mainly done in line with the market demand of the previous month, in the order of Sales Price in case of any limit of resources. The company now wants to optimize its product mix to earn the maximum profitability. The following information is available.

You are required to advise on the optimum product mix for the company.

	UoM	X	Y	Z
Sales Price	Rs. Per unit	500	450	400
Variable Manufacturing Costs		100	90	75
Variable Overheads		20	25	15
Total Demand	No. of units	1000	2000	4000
Machine hours reqd. for production	Hours Per unit	25	15	12

 

Total machine hours available for the year 1,00,000 hours only. Also, the company incurred Fixed Manufacturing Overheads of Rs. 1,00,000 and fixed Selling Expenses of Rs. 45,000. Both these expenses are generally apportioned in the ratio of no. of units produced.  (5 marks)

Ans 3b.

Introduction

Agarwal & Sons aims to optimize its product mix to maximize profitability, considering production constraints and market demand. An analysis based on the contribution margin per unit and per machine hour, combined with the limited availability of machine hours, will guide the decision on the most profitable production strategy. This approach aligns with achieving the highest possible