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PROJECT REPORT
ON
Marketing Strategy Adoptedby
Fairness Cream Manufacturesin Wardha City
Submitted to the RashtrasantTukadoji Maharaj
Nagpur University, Nagpuras a partial fulfillment of
Bachelor of Business AdministrationBachelor of Business Administration
Submitted By
Ms. Shilpa Gedam
Guided ByMe
Mr. Mohan Savade
Department of Commerce &
Management
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New Arts, Commerce &
Science College, Wardha
2010-2011
Department of Commerce &
Management
New Arts, Commerce &
Science College, Wardha
CertificateThis is to certify that the Project
Report entitledMarketing Strategy Adopted
byFairness Cream Manufactures
in Wardha City
Submitted By[
Ms. Shilpa Gedam
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Has been duly completed insatisfactory manner as a
partial fulfillment of the award of
Bachelor of Business AdministrationBachelor of Business AdministrationRashtrasant Tukdoji Maharaj Nagpur
University,Nagpur, under my supervision and
guidance.
Project Guide
Mr. Mohan Savade
Mr Mohan Savade Dr.
Vandana Palsapure
(Co-ordinator) (Principal)
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Acknowledgements
To acknowledge all the persons who had helped for the
fulfillment of the project is not possible for any researcher but in
spite of all that it becomes the foremost responsibility of the
researcher and also the part of research ethics to acknowledge
those who had played a great role for the completion of the
project.
So in the same sequence at very first, I would like to
acknowledge my parents because of whom I got the existence
in the world for the inception and the conception of this project.
Later on I would like to confer the flower of acknowledgement
my guide Mr Mohan Savade and other faculty members who
taught me that how to do project through appropriate tools and
techniques.
Rest all those people who helped me are not only matter of
acknowledgment but also authorized for sharing my success.
Rupesh Bharati
DECLARATION
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I hereby declare that this project submitted by me is based on
actual work carried out by me under the guidance and
supervision of Mr Mohan Savade . Any reference to work
done by any other person or institution or any material
obtained from other sources have been duly cited and
referenced. It is further to state that this work is not submitted
anywhere else for any examination.
RupeshBharati
Date
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Contents
Chapter 1 Introduction to Logistics 1-7
Chapter 2 Objective of Study 8--8
Chapter 3 Research Methodology 9-10
Chapter 4 Company Profile DHL 11-39
Chapter 5 Data Analysis & Interprtation 40-48
Chapter 6 Conclusions & Suggestions 49-51
1. Bibliographie
2. Questionnaire
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Introduction
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Leverage Analysis
In finance, leverage or leveraging refers to the use of debt to supplement
investment. Companies usually leverage to increase returns to stock, as this
practice can maximize gain (and losses). The easy but high risk increases in a
stock prices due to leveraging at US banks has been blamed for the usually
high rate of pay for top executives during the recent banking crisis, since gains
in stock are often rewarded regardless of method. Delivering in the action of
reducing borrowings. In microeconomics, a key ensure of leverage is debt to
GDP ratio.
There are three types of leverage
1. Operating leverage
2. Financial Leverage
3. Combined Leverage
Cost Behavior
Separating Mixed Costs into their variable and fixed elements. Mixed
costs are common to a wide range of firms. Examples of mixed costs include
sales compensation, repairs and maintenance, and factory overhead in
general. Mixed costs must be separated into the variable and fixed elements in
order to be included in a variety of business planning analyses such as Cost-
Volume-Profit (CVP) Analysis.
The way a specific cost reacts to changes in activity levels is called cost
behavior. Costs may stay the same or may change proportionately in
response to a change in activity. Knowing how a cost reacts to a change
in the level of activity makes it easier to create a budget, prepare a
forecast, determine how much profit a new product will generate, and
determine which of two alternatives should be selected.
Fixed costs
Fixed costs are those that stay the same in total regardless of the number of
units produced or sold. Although total fixed costs are the same, fixed costs per
unit changes as fewer or more units are produced. Straight-line
http://www.answers.com/topic/cost-volume-profit-cvp-analysishttp://www.answers.com/topic/cost-volume-profit-cvp-analysishttp://www.answers.com/topic/cost-volume-profit-cvp-analysishttp://www.answers.com/topic/cost-volume-profit-cvp-analysis8/6/2019 Fair Shilpa
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Depreciation is an example of a fixed cost. It does not matter whether the
machine is used to produce 1,000 units or 10,000,000 units in a month; the
depreciation expense is the same because it is based on the number of years
the machine will be in service.
Variable costs
Variable costs are the costs that change in total each time an additional unit is
produced or sold. With a variable cost, the per unit cost stays the same, but
the more units produced or sold, the higher the total cost. A direct material is
a variable cost. If it takes one yard of fabric at a cost of $5 per yard to make
one chair, the total materials cost for one chair is $5. The total cost for 10
chairs is $50 (10 chairs $5 per chair) and the total cost for 100 chairs is$500 (100 chairs $5 per chair).
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INTRODUCTION
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INRODUCTION OF THE TOPIC
LEVERAGE
A company can raise the fund required for investment either by
increasing owners claims or the creditors claim or both. The claims of
the owners increases when the company raises the fund by issuing
equity shares or ploughs back its earnings. The claims of the creditors
increase when the funds are raised by borrowings. The various means
used to raise the funds represent the financial or the capital structure of
the company.
The financing or capital structure decision is of tremendous significance
for the management, since it influences the debt-equity mix of the
company, which ultimately affect shareholders return and risk. In case
the borrowed funds are more as compared to the owners funds, it
result in increase in shareholders earning together with increase in
their risk. This is because the cost of borrowed fund is less than that of
shareholders fund on account of the cost of borrowed fund being
allowable as a deduction for income tax purpose. But at the same time,
the borrowed fund carry a fixed interest, which has to be paid whether
the company is earning profit or not. Thus, The risk of the shareholders
increase in case there is high proportion of borrowed funds in the total
capital structure of the company. In a situation where the proportion of
the shareholders fund is more that the proportion of the borrowed fund,
the return as well as the risk of shareholders will be much less.
MEANING OF LEVERAGES
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The dictionary meaning of the term leverage refers to an increased
means of accomplishing some purpose. For example, leverages helps
us in lifting heavy objects, which may not be otherwise possible.
However in the area of finance, the term leverage has special meaning.
It is used to describe the firms ability to use fixed cost asset or funds to
magnify the return to its owners.
James Horne has defined leverage as The employment of an asset or
funds on which the firm pays a fixed cost or fixed return. Thus,
according to him, leverage is the result of the firm employing an asset
or a source of fund which has a fixed cost or return is the fulcrum of
leverage. If a firm is not required to pay fixed cost or fixed return, there
will be no leverage.
Since fixed cost or return has to be paid or incurred irrespective of the
volume of output or sales, the size of such cost or return has
considerable influence over the amounts of profit available for the
shareholders. When the volume of sales changes, leverage helps in
quantifying such influence. It may, therefore, be defined as the relative
change profit due to change in sales. A high degree of leverage implies
that there will be a large change in profit due to relatively small change
in sales and vice-versa. Thus, higher the leverage, higher is the risk and
higher is the expected return.
TYPES OF LEVERAGES
Leverages are of three types:
1. Operating leverage
2. Financial leverage
3. Composite leverage/Combined leverage
1. Operating Leverage
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Operating leverage may be defined as the tendency of the operating
profit to vary disproportionately with sales. It is said o exist when a firm
has to pay the fixed cost regardless of volume of output or sales. The
firm is said to have a high degree of operating leverage if it employs a
greater amount of fixed cost and a smaller amount of variable costs. On
the other hand, a firm will have a low operating leverage when it
employs a greater amount of variable costs and smaller amount of fixed
cost. On the other hand, a firm will have a low operating leverage when
it employ a greater amount of variable cost and a smaller amount of
fixed costs. Thus, the degree of operating leverage depends upon the
amount of fixed element in cost structure.
Operating leverage in a firm is a function of the following three factors:
1. The amount of fixed cost
2. The contribution margin
3. The volume of sales
Of course, there will be no operating leverage, if there are no fixed
operating costs.
The operating leverage can be calculated by following formula:
Contribution C
Operating Leverage = or
Operating Leverage OP
Operating profit here means Earnings before interest & tax (EBIT).
Operating leverage may be favorable or unfavorable. In case the
contribution (i.e. sales less variable cost) exceeds the fixed cost, there
is favorable operating leverage. In a reverse case, the operating
leverage will be termed as unfavorable.
Degree of Operating Leverage
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The degree of operating leverage may be defined as percentage change
in the profits resulting from a percentage change in the sales. It may be
put in the form of following formula:
Percentage change in profit
Operating Leverage =
Percentage change in sales
Utility
Operating leverage indicates the impact of change in sales of operating
income. If a firm has high degree of operating leverage, small changes
in sales will have large effect on operating income, In other words, the
operating profit (EBIT) of such a firm will increase at a faster rate than
the increase in sales. Similarly the operating profit of such a firm will
suffer a greater loss as compared to reduction in its sales.
Generally, the firm does not like to operate under condition of high
degree of operating leverage. This is a very risky situation Can be
excessively damaging to the firms effort to achieve profitability.
2. Financial Leverage
Financial leverage may be defined as the tendency residual net incometo very disproportionately with operating profit. It indicates the change
that takes place in the taxable income as a change of result in
operating income. It signifies the existence of fixed interest /fixed
dividend bearing securities in the total capital structure of the company.
Thus, the use of fixed interest/dividend bearing securities such as debt
& preference capital along with the owners equity in the total capital
structure of the company, the fixed interest/dividend bearing securitiesare greater as compared to the equity capital, the leverage is said to be
larger. In a reverse case the leverage will be said to be smaller.
Favourable and unfavourable Financial Leverage
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Financial leverage may be favourable or unfavourable depending upon
whether the earning made by the use of fixed interest or dividend-
bearing securities exceed or not the explicit fixed cost, the firm has to
pay for the employment of such funds. The leverage will be considered
to be favourable so long the firm earns more on assets purchased with
the fund than the fixed cost of their use. Unfavourable or negative
leverage occurs when the firm does not earn much as the fund cost.
Computation
Computation of Financial leverage can be done according to
following methods:
(i) Where capital structure consist of equity shares and debt. In such a
case Financial leverage can be calculated a according to the following
formula:
OP
Operating leverage =
PBT
Where,
OP = Operating profit or Earnings before interest & tax(EBIT)
PBT = Profit before tax but after interest
(ii) Where the capital structure consist of preference shares and equity
shares. The formula for computation of financial leverage can also be
applied to a financial plan having preference shares. Of course, the
amount of preference dividend will have to be grossed up (as per the
tax rate applicable to the company) and deducted from the earnings
before interest and tax.
Degree of Financial leverage
Degree of financial leverage may be defined as he percentage change in
taxable profit as a result of percent change operating profit.
This may be put in the form of following equation:
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Percentage change in Taxable income
Degree of Financial leverage=
Percentage change in operating income
Alternative definition of Financial Leverage
One of the objective of planning an appropriate capital structure is to
maximize the return on equity share holders funds or maximize the
earning per shares(EPS).Some authorities have used the term Financial
Leverage in the context that it defines the relationship between EBIT &
EPS. According to Gitman, Financial leverage is The ability of a firm to
use fixed financial charges to magnify the effects of changes in EBIT on
the firms earnings per share. The financial leverage, therefore, indicate
the percentage change in earning per share in relation to a percentage
change in EBIT.
Percentage change in EPS
Degree of Financial leverage=
Percentage change in EBIT
Utility
Financial leverage helps the financial manager considerably while
devising the capital structure of the company. A high financial leverage
means high fixed financial cost and high financial risk. A Financial
manager must plan the capital structure in a way that the firm is in a
position to meet its fixed financial costs. Increase in the fixed financial
cost requires necessary increase in EBIT level. In the event of failure to
do so, the company may be technically forced into liquidation.
3. Composite Leverage
As explained in the preceding pages, operating leverage measures
percentage changes in operating profit due to percentage changes in
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sales. It explains the degree of operating risk. Financial leverage
measures the percentage change in taxable profit (or EPS) on account
of percentage change operating profit (i.e., EBIT). Thus, it explains the
degree of financial risk. Both these leverages are closely concerned with
the firms capacity to meet its fixed costs (both operating & financial).
In case both the leverage are combined, the result obtained will
disclosed the effect of change in sales over change in taxable profit (or
EPS).
Composite leverage thus expresses the relationship between revenue on
account of sales (i.e., contribution or sales less variable cost) and the
taxable income. It helps in findings out the resulting percentage change
in taxable income on account of percentage change in sales. This can be
computed as follows:
Composite Leverage = Operating Leverage * Financial Leverage
= (C / OP) * (OP / PBT) = C / PBT
Where,
C = Contribution (i.e., Sales Variable cost)
OP = Operating profit or Earnings before interest & tax
PBT = Profit before tax but after Interest
SIGNIFICANCE OF LEVERAGE
Operating leverage and financial leverage are the two quantitative tools
used by the financial expert to measure the returns to the owners (viz.,
EPS) and the market price of the equity shares. The financial leverage is
considered to be the superior of these tools, since it focuses the
attention on the market price of the shares which the management
always tries to increase by increasing the Net worth of the Firm. The
management for this purpose resorts to trading on equity because when
there is increase in EBIT then there I corresponding increase in the
price of equity shares. However a firm cannot go on indefinitely raising
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the debt content in the total capital structure of the company. If a firm
goes on employing greater proportion of debt capital, the marginal cost
of debt will also go on increasing because the subsequent lenders will
demand higher rate of interest. The companys inability to offer the
subsequent assets as security will also stand in the way of further
employment on debt capital. Moreover, a firm with widely fluctuating
cannot afford to employ a high degree of financial leverage.
A company should try to have balance of the two leverages because
they have got tremendous acceleration deceleration effect on EBIT and
EPS. It may be noted that a right combination of these leverages is a
very big challenge for the management. A proper combination of both
operating & financial leverages is a blessings for firms growth, while an
improper combination may prove to be curse.
A high degree of operating leverage makes the position of firm very
risky. This is because on the one hand on the one hand it is employing
excessively assets for which it has to pay fixed cost and at the same
time it is using a large amount of debt capital. The fixed cost towards
using assets and fixed interest charges bring a greater risk to the firm.
In case the earning falls, the firm may not be in a position to meet its
fixed cost. Moreover, greater fluctuation in earnings is likely to occur on
account of the existence of a high degree of operating leverage.
Earnings to the equity share holders will also fluctuate widely on
account of existence of a high degree of financial leverage. The
existence of a high degree of operating leverage will result in a more
than proportionate change in EPS even on account of small changes in
EBIT. Thus, a firm has high degree of financial leverage and high degree
of operating leverage has to face the problems of inadequate liquidity or
insolvency in one or the other year. It does not, however, mean that a
firm should opt for low degree of operating & financial leverage. Of
course, such lower leverages indicate the caution policy of the
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management. But the firm will be losing many profit earnings
opportunities. A firm should, therefore, make all possible efforts to
combine operating & financial leverage in a way that suits the risk
bearing capacity of the firm.
It may be observed that the firm with the high operating leverage should not
have a high financial leverage. Similarly, a firm having low operating leverage
will stand to gain by having a high financial leverage provided it is enough
profitable opportunities for the employment of borrowed fund. However, low
operating leverage is considered to be an ideal situation for the maximization
of profit with minimum of risk.
COST BEHAVIOR
Cost behavior is the measure of how a cost responds to changes in the
level of business activity. Understanding of how costs behave in a particular
situation is crucial for decision-making process in an organization. Thus the
production performance results reported on the income statement.
Cost behavior information allows managers:
To prepare budgets
To predict cash flows
To plan dividend payments
To establish selling prices
Depending on the cost behaviors, there are four common cost types,
which are variable, fixed, mixed, and step-variable costs.
Main Features of marginal Costing
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1. Marginal costing is technique or working of costing, which is used in
conjunction with other method of costing.
2. Fixed & variable cost is kept separate at every stage. Semi-variable cost
is also separated into fixed & variable.
3. As fixed is period cost. They are excluded from product cost or cost of
production or cost of sales. Only variable cost is considered as the cost
of the product.
4. When evaluation of finished goods and work-in-progress are taken into
account, they will be only variable cost.
5. As fixed cost is period cost, they are charged to profit and loss account
during the period in which they are incurred. They tar not carried
forward to the next years income.
6. Marginal income or marginal contribution known as income or the profit.
7. The difference between the contribution & fixed cost is the net profit or
loss.
8. Fixed cost remains constant irrespective of level of activity.
9. Sales price and variable cost per unit remains the same.
10. Cost-volume-profit relationship is fully employed to revel the
state of profitability at various level of activity.
Advantages of cost behavior analysis
1. Constant in nature: - Variable cost fluctuates from time to time,
but in the long run, marginal cost is stable. Marginal cost remains the same,
irrespective of volume of production.
2. Effective cost control: - It divides cost into fixed & variable. Fixed
cost is excluded from product. As such, management can control marginal cost
effectively.
3. Treatment of overhead simplified: - It reduces degree of over or
under recovery of overhead due to the separation of fixed overhead from
production cost.
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4. Uniform & realistic valuation: - As fixed overhead cost are
excluded from product cost, the valuation of work-in-progress and finished
goods become more realistic.
5. Helpful to management: - It enables management to start a new
line of production which is advantageous. It is helpful in determining which is
profitable whether to buy or manufacture a product. The management can
take decision regarding pricing & tendering.
6. Help in production planning: - It shows amount of profit at every
level of output with the help of cost volume profit relationship. Here the break-
even chart is made use of.
7. Better result: - When used with standard costing, it gives better
result.
8. Fixation of selling price: - The differentiation between cost &
variable cost is very helpful in determining the selling price of product or
services. Sometimes, different prices are charged for the same article in
different market to meet varying degree of competition.
9. Help in budgetary control: - The classification of expenses is very
helpful in budgeting and flexible budget for various levels of activities.
10. Preparing tenders: - Many business enterprises have to complete
in the market in quoting the lowest price. Total variable cost, when separately
calculated, becomes the floor price. Any price above this floor price may be
quoted to increase the total contribution.
11.Make or Buy Decision: - Some time a decision has to be made
whether to manufacture a component or a product to buy it readymade from
the market. The decision to purchase it would to be taken if the price paid
recovers some of the fixed expenses.
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12. Better presentation: - The statement & graphs prepared under
marginal costing are better understood by management executives. The
break-even-analysis presents the behavior of cost, sales, contribution etc. in
terms of chart & graphs. And, the result can easily be grasped.
Disadvantages of cost behavior analysis
1. Difficulty to analyze overhead: - Separation of cost into fixed &
variable is a difficult problem. In marginal costing, semi-variable & semi-fixed
cost is not considered.
2. Time element ignored: - Fixed cost and variable costs are different
in the short run; but in the long run, all cost are variable. In the long run all
cost change at varying level of operation. When new plant & equipment are
introduced, fixed cost & variable cost will vary.
3. Unrealistic assumption: - Assumption of the sale price will remain
the same at different levels of operation. In real life, they may change & give
unrealistic result.
4. Difficulty in fixation of price: - Under marginal costing, selling
price is fixed on the basis of contribution. In case of cost plus contract, it is
very difficult to fix price.
5. Complete information not given: - It does not explain the reason
for increase in production or sale.
6. Significance lost: - In capital-intensive industry, fixed cost occupy
major portion in the total cost. But marginal cost only covers variable cost. As
such, it loses its significance in capital industry.
7. Problem of variable overhead: - marginal costing overcomes the
problem of over and under-absorption of fixed overhead. Yet there is the
problem in the case of variable overhead.
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8. Sales-oriented: - Successful business has to go in a balanced way
in respect of selling production function. But marginal costing is criticized on
account of its attaching over-importance to selling function. Thus it is said to
be sales-oriented. Production function is given less importance.
9. Unrealistic Stock valuation: - Under marginal costing stock of
work in progress & finished stock is valued at variable cost only. No portion of
fixed cost is added to the value of stock. Profit, determined, under this
method, is depressed.
10. Claim for loss of stock: - Insurance claim for loss or damage of
stock on the basis of such a valuation will be unfavorable to business.
11. Automation: - Now-a-days increasing automation is leading to
increase in fixed costs. If such increasing fixed cost is ignored, the costing
system cannot be effective and dependable.
Marginal costing, if applied alone, will not be much in use, unless it is
combined with other techniques like standard costing & budgetary control.
MARGINAL COSTINGIn marginal costing, only variable cost is charged to production. The
Institute of cost & management accountants (U.K.) defines it as, the practice
of charging all cost, both variable & fixed to operation, process or product.
This explains why this technique is also called full costing. Administrative,
selling & Distribution overhead as much from part of total cost as prime cost &
factory burden.
Cost-Volume-Profit Analysis
As the term itself suggest, the cost-volume-profit (CVP) analysis is the
analysis of three variables, viz., cost, volume and profit. In CVP analysis, an
attempt is made to measure variation of cost and profit with volume. Profit as
variable in the reflection of number of internal and external condition which
exert influence on sales revenue and costs.
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The CVP analysis helps or assists the management in the profit
planning. In order to increase the profit, a concern must increase the output.
When the output is at maximum, within the installed capacity, it adds to the
contribution. The CVP analysis is relationship among the cost, Volume and
profit. When volume of output increases, the fixed cost per unit decreases.
Therefore, profit will be more, when sales price remains constant. Generally,
cost may not change in direct proportion to the volume. Thus, a small change
in the volume will affect the profit.
The management is always interesting in knowing that which product or
product mix to most profitable, what effect a change in the volume of output
will have on cost of production & profit etc. All these problems are solved with
the help of CVP analysis.
To know the cost volume profit relationship, a study of following is
essential.
1. Marginal cost formulae:
2. Breakeven-analysis:
3. Profit volume ratio:
Marginal Cost Equations
Sales = Variable Cost + Fixed Cost + Profit or Loss
Sales Variable cost = Fixed Cost + Profit or LossSales Variable cost = Contribution
Contribution = Fixed Cost + Profit
Contribution
Contribution is the difference between sales & marginal cost of sales.
Contribution Enables to meet fixed cost and adds to the profit. Contribution is
also known as Gross margin. Fixed cost is covered by the contribution; and
the balance amount in an addition to the net profit.
Marginal Cost = prime cost + Variable Overhead
Contribution = Sales Marginal cost
Contribution = Sales Variable cost
Contribution = Fixed Cost + Profit or Loss
Profit = Contribution Fixed cost
Sales Variable cost = Fixed Cost + Profit or Loss
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(or) C = S V
C = F + P
S V = F + P
C= Contribution, S= Sales, V= Variable cost,
P= Profit, F= Fixed Cost.
Break-Even Analysis
The Break-Even point Break-Even chart is two by-product of Break-Even
analysis. In a narrow sense, it is concerned with break-even chart. Break-even
analysis is also known as CVP analysis. The analysis is a tool of financial
analysis whereby impact on profit of changes in volume, price, costs and mix
can be estimated with reasonable accuracy. Break-even point is equilibrium
point or is a point where the income is exactly equal to expenditure.
Break even point. Break-even point is a point where the total sales
are equal to total cost. In this point there is no profit or no loss in the volume
of sales. The formula to calculate break-even point is:
Total Fixed cost
B.E.P. (in unit) =
Contribution per unit
Total Fixed cost
B.E.P. (in sales) =
Profit Volume ratio
Profit Volume Ratio
Profit volume ratio, which is popularly known as P/V ratio; express the
relationship of contribution to sales. Another name for this ratio is contribution
sales ratio or marginal-income ratio or variable-profit ratio. The ratio,
expressed as a percentage, indicate the relative profitability of different
product.
The formula for computing the P/V ratio is given below:
Contribution
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P/V Ratio =
Sales
Or Fixed Cost + Profit
=
Sales
Or Sales - Variable Cost
=
Sales
It can also be expressed in percentage. Normally, this ratio expressed in
percentage. When we know the P/V ratio, B.E.P. can be calculated by using
the formula
Total Fixed cost F
B.E.P. (in Sales) = (or)
Profit Volume ratio P/V ratio
The profit of a business can be increased by improving P/V ratio. As
such management will make effort to improve the ratio. A higher ratio means
greater profitability and vice-versa. So management will increase the P/V
ratio:(a) By sales price per unit
(b) By decreasing variable cost
(c) By increasing the production of product which is having high P/V
ratio and vice-versa
P/V ratio is very important in decision making. It can be used for
The calculation of B.P.E. and in problem regarding profit sales relationship.
Margin of Safety
Margin of Safety is an important concept in marginal costing approach.
Total sales minus the sales at break-even point are known as Margin of safety
(M/S). That is, margin of safety is the excess of normal or actual sales over
sales at B.E.P. In other words, sales over & above break-even sales are known
as margin of safety. The Margin of safety refers to the amount by which sales
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revenue can fall before a loss is incurred. That is, it is the difference between
the actual sales and sales at break-even point. Break-even point can be
compared to a Red Signal point. If the margin of safety is large, it is a sign of
soundness of the business and vice versa. The margin of safety serves as a
guide is a reliable indicator of business strength & soundness. Margin of safety
can be expressed in absolute sales amount in percentage.
High Margin of safety indicates the soundness of a business because
even substantial fall in sale or fall in production, some profit shall be made.
Small margin of safety on the other hand is an indicator of weak position of
the business and even a small reduction in sale or production will adversely
affect the profit position of the business.
Margin of safety can be increased by:
a) Decreasing the fixed cost
b) Decreasing the variable cost
c) Increasing the selling price
d) Increasing the output & sales
e) Changing to a product mix that improve P/V ratio
Margin of Safety = Actual Sales Sales at BEP
Profit
Or =
P/V ratio
Profit
Or =
Contribution
FUNCTIONAL AND CONTRIBUTION MARGIN INCOME STATEMENTS
Up until now, we have been using the functional, or traditional, or
conventional income statement format that you learned in financial
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accounting. But managers are better aided in their decision making by a
contribution margin or variable costing income statement.
A traditional, functional income statement is required for external
financial statements. It separates costs by their function: product costs or
period costs. Product costs (COGS) are subtracted from sales to show gross
margin (gross profit). All period costs (selling, general, and administrative) are
then subtracted to show operating income.
Sales
` Less Cost of goods sold (including DM, DL, VOH, and FOH)
Gross margin
Less operating expenses
Variable selling, general, and administrative expenses
Fixed selling, general, and administrative expenses
Net operating income
The contribution margin income statement is preferable for management
purposes. It separates costs by their behavior: variable costs and fixed costs.
It also works very well with CVP analysis. All variable costs, both product and
period, are subtracted from sales to show contribution margin. All fixed costs,
both fixed overhead (a product cost) and fixed period costs, are then
subtracted to show operating income. Fixed overhead is subtracted in totalregardless of how many are produced or sold.
Sales
Less variable cost
Variable cost of goods sold (including DM, DL, and VOH)
Variable selling, general, and administrative expenses
Contribution margin
Less fixed costs
Fixed overhead
Fixed selling, general, and administrative expenses
Net operating income
If all units produced are also sold, the operating income will be the
same regardless of the type of income statement produced.
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On the contribution margin income statement, note that everything,
including sales, direct materials, direct labor, variable overhead, variable
selling/general/administrative, and contribution margin will vary in direct
relationship to the number of units sold. The fixed costs, both fixed overhead
and fixed selling/general/administrative, remain the same whether we sell any
number of units or no units. Well find this concept very helpful when we
analyze the relationships among costs, volume, and profit.
The way a specific cost reacts to changes in activity levels is called
cost behavior. Costs may stay the same or may change proportionately in
response to a change in activity. Knowing how a cost reacts to a change in
the level of activity makes it easier to create a budget, prepare a forecast,
determine how much profit a new product will generate, and determinewhich of two alternatives should be selected.
1. Variable Cost varies proportionately in total but remains constant on a per
unit basis.
a. True variable costs proportionately variable (ex. Raw material)
amount used directly increases as production increases by the same
percentage.
b. Step variable costs costs obtainable in large segments (ex. Laborcosts of maintenance workers) and that increase or decrease in
response to fairly wide changes in activity levels.
costs are constant for a certain activity level (relevant range) and then
vary in a step like fashion as volume increases.
2. Fixed Costs remain constant in total but vary inversely on a per unit basis
(if production increases, then per unit cost decreases; if production decreases,
then per unit cost increases)
a. Committed fixed costs relate to the investment in plant, equipment
and the basic organizational structure of the firm (ex. Depreciation of
building and equipment, real estate taxes, insurance, management
salaries, etc.)
- are long term in nature
- cannot be reduced immediately over a short period of time
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without seriously impairing either the profitability or the long run
goals of a firm.
b. Discretionary Fixed Costs (ManagedFixed Costs)
- arise from annual decisions by management to spend in certain
fixed costs areas (ex. Advertising, research, management
development programs)
- Short term in nature, usually a single year
- Possible to cut back on certain costs for short periods of time
with minimum disruptions to long term goals.
c. Semi variable or Mixed Costs contains both variable and fixed
costs elements
- At certain levels of activity mixed costs display the same
Characteristics as a fixed cost
- At certain levels they display same characteristic as a variable
cost
- (examples: electricity, heat, telephone, maintenance, car rental,
copy machine rental)
INRODUCTION TO COMPANY PROFILE
The VIDARBHA LIQUOR CORPORATION is situated in the Heart of
Nagpur City. The company is the member of VIDARBHA INDUSTRIAL
ASSOCIATION(VIA).The company is famous across all the vidarbha region
as a leading liquor provider. The company is not only providing liquor to the
Nagpur District but also the near Districts of the Nagpur. The distribution of
company is to Madhya Pradesh also. The company is also deals in the Foreign
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Brands .The Manufacturing unit & Administrative office is situated at same
location. The Company is influencing most of all on local brands.
INFORMATION OF COMPANY :-
1. Name of Company :-M/S. VIDARBH LIQUOR CORPORATION
2. Owner of Company :- 1. Mr. RAMESH JESWANI
2. JAL SALASAR TRADERS PVT. LTD.
3. Address :- 30/30,NEW COTTON MARKET LAY OUT
NEAR S.T. STAND, NAGPUR-440018.
4. Product :- COUNTRY & FOREIGN LIQUOR
5. PAN :- AADFV 8562- H
6. STATUS :- REGD. FIRM
7. TYPE OF FIRM :- PARTNERSHIP FIRM
SHARES OF PARTNERS
PARTNERS SHARE PERCENTAGE
Ramesh Jaiswani 60%
Jal Salasar Traders Pvt. Ltd. 40%
Following books of accounts are maintained at the company.
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Cash Book
Ledgers Book
Bank Book
Journal
The company is using the Mercantile system of Accounting. The valuation of
the closing stock is employed at cost or net realizable value whichever is
lower.
ADDRESS OF COMPANY
Vidarbha Liquor Corporation.
30/30, NEW COTTON MARKET LAY OUT
NEAR S.T. STAND, NAGPUR-440018.
AIMS & OBJECTIVES OF STUDY
The objectives of Leverage & cost behavior analysis are as follows:-
Analysis of Operating, Financial & Combined Leverage.
To understand the Degree of Operating, Financial & Combined Leverage.
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To check change in the profit from income statement using the
contribution format.
To study thy profit volume analysis.
To study the Break-Even analysis of company.
To understand how the fixed & variable cost behave with respect to the
sale & how it is used to predict cost.
HYPOTHESIS OF STUDY
The Hypothesis for cost behavior analysis are as follows :-
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The changes in the level of various revenue and cost arise only because
of the changes in the number of product (or service) units produced &
sold.
Total cost can be divided into a fixed component and a component i.e.,
variable with respect to the level of output.
There is linear relationship between revenue & cost.
All revenue and cost can be added and compared without taking into
account the time value of money.
LIMITATIONS OF STUDY
The limitations for study are as follows:-
Inventories are valued at variable cost & fixed cost is treated as period
cost. Therefore, closing stock carried over to the next financial year
does not contain any component of fixed cost. Inventory would be
valued at full cost in reality.
The study is limited for two years statement of accounts VIDARBHA
LIQUOR CORPORATION.
The scope & duration of study is limited.
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RESEARCH
METHODOLOGY
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RESEARCH METHODOLOGY
Research in common parlance refers to a search for knowledge.
Research can also be defined as a scientific and system search for pertinentinformation on specific topic. We can also say research as an art of scientific
investigation.
In analytical research, the researcher has to use facts or information
already available, and analyze these to make a critical evaluation of the
material.
Descriptive research includes surveys and fact finding enquiries of
different kinds. The major purpose of descriptive research is description of the
state of affairs, as it exists at present.
Other method used is the observational and interactive method which is used
to observe the working of the company
Step 1: Research Objectives
To find out the various cost involved in operation of Vidarbha Liquor
Corporation.
To check that how these cost behave as per the change in the level
of production.
To analyze the cost-volume-profit.
Find out the Break Even Point & Margin of Safety for company.
To study the Accounting operation involved in the Organization.
Analysis of operating, financial & combined leverage.
To understand the degree of operating, financial & combined
leverage.
Step 2: Develop the Research Plan
A: Data sources Primary data :-
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The data has been collected by the discussion with the renowned
Company guide on successfully relating to company profile & Accounting
operation with relation to mine.
Secondary data :-
The data has been collected from the Annual reports of company for
2007-08 & 2008-09.
B: Research Approaches
Analytical Research: - It is best suited for Financial Analysis .Uses
Fact or information already available and analyzes to make a criticalevaluation.
Descriptive Research: - Survey & fact finding enquiries, State of
affairs as it exists, No control over variables, try to discover cause.
C: Research Instrument
Primary data collection instrument:
Company Project guides Mr. Yogesh Bangale.
Secondary data collection instrument:
Balance Sheet of VIDARBHA LIQUOR CORPORATION
Profit & Loss Account of VIDRBHA LIQUOR CORPORATION
Internal (company journals, manuals)
Step 3: Collect the Information
Our primaries are collected from personal interview and
desk research and the material that we received collected secondary
data from other sources.
Step 4: Analyze the Information
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Here we tabulate all data and use tables, charts, pie
charts and some advance statically techniques to analyze the raw data
and convert those data into some meaningful information.
Step 5: Present the Findings
We have presented our analysis in verbal form, tabular
form as well as graphical form.
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Analysis &
Findings of Study
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INCOME STATEMENT FOR THE YEAR 2008-2009
PARTICULARS AMOUNT
Sales 100940319.00
Less Variable Cost 53237939.58
Contribution 47702379.42
Less Fixed Cost 435869.00
Net Operating Profit(EBIT) 47266510.42
Less Interest 1023137.36
Profit Before Tax(PBT) 46243373.06
Less Tax Paid 42411.00
Profit after tax or net profit 46200962.06
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Calculation of variable Cost
PARTICULARS AMOUNT
1. Consumption P. Material 47624207.10
2. Consumption of R. Material 40126507.40
3. Direct expenses 3265294.00
4. Building repairs & maintenance 69711.00
5. Charity & Donation 10401.00
6. Conveyance 874481.00
7. Electricity 172812.00
8. Employee state insurance 27977.00
9. Finance charges 99084.00
10. Generator Fuel & rent 147855.00
11. Insurance 52338.00
12. License & other fee expenses 2084050.00
13. Machinery repairs & maintenance 56671.00
14. Maharashtra state labour welfare fund 30000.00
15. Miscellaneous expenses 5996.64
16. N.I.T. Ground rent 20804.00
17. Postage 5906.00
18. Printing & stationary 13648.00
19. Provident fund 153178.00
20. Repair & maintenance 69187.00
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21. Sample & chemical analysis 109599.00
22. State Ex. Escort charges 87469.00
23. State Excise charges 263691.00
24. Sundry Expenses 266878.66
25. Telephone expenses 35455.00
26. Transportation expenses 95029.00
27. Travelling expenses 155225.00
28. Vehicle maintenance 163674.78
29. Weight & Measure 12610.00
Total 53237939.58
Calculation of Fixed Cost
PARTICULARS AMOUNT
1. Advertisement expenses 10456.00
2. Salary 413413.00
3. Sales promotion 12000.00
Total 435869.00
Calculation of Total Interest
PARTICULARS AMOUNT
1. Bank Commission Interest & charges 58718.36
2. Bank Interest 862713.00
3. Interest 61079.00
4. Interest on VAT 40627.00
Total 1023137.36
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Calculation of Tax Paid
PARTICULARS AMOUNT
1. Corporation tax 25278.00
2. Sales Tax 17133.00
Total 42411.00
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INCOME STATEMENT FOR THE YEAR 2007-2008
PARTICULARS AMOUNT
Sales 71442096.00
Less Variable Cost 66173933.28
Contribution 5268162.72
Less Fixed Cost 319086.00
Net Operating Profit(EBIT) 4949077.72
Less Interest 1400578.00
Profit Before Tax 3548499.72
Less Tax Paid 25534.00
Profit after tax on net profit 3522965.72
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Calculation of variable Cost
PARTICULARS AMOUNT
1. Consumption of P. material 36364088.30
2. Consumption of R. material 22136758.98
3. Direct Expenses 3213217.00
4. Computer maintenance 6020.00
5. Electricity 102230.00
6. Insurance 46324.00
7. Legal fees 86534.00
8. License & others 1891650.00
9. Machinery repairs & maintenance 9207.00
10. Postage 8470.00
11. Maharashtra state labour welfare fund 1056.00
12. Printing & stationary 60744.00
13. Sample & chemical analysis 80670.00
14. Commission on sale 104800.00
15. State Excise escort charges 94085.00
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16. Travelling 95216.00
17. Charity & Donations 7572.00
18. Consultancy expenses 84000.00
19. Diesel & Oil 636268.00
20. Transportation 257064.00
21. Maharashtra Pollution control 4200.00
22. Loading & unloading expenses 3670.00
23. Employee state insurance 27627.00
24. Ganging Expenses 10000.00
24. NIT ground rent 5526.00
25. Provident fund 291986.00
26. Repair & maintenance of building 17561.00
27. Security charges 59204.00
28. State Excise charges 333295.00
29. Sundry expenses 48435.00
30. Vehicle maintenance 79605.00
31. Brokerage 6850.00
Total 66173933.23
Calculation of Fixed Cost
PARTICULARS AMOUNT
1. Advertisement expenses 10586.00
2. Salary 308500.00
Total 319086.00
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Calculation of Total Interest
PARTICULARS AMOUNT
1. Bank Commission Interest & charges 87053.00
2. Bank Interest 976442.00
3. Interest on Tanker loan 80873.00
4. Interest 256210.00
Total 1400578.00
Calculation of Tax Paid
PARTICULARS AMOUNT
1. Corporation tax 25534.00
Total 25534.00
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Calculation of Operating Leverage
The formula for computing the Operating leverage is given below:
Contribution
Operating leverage =
Operating profit
FOR THE YEAR CALCULATION RESULT
2007-2008 5268162.72/4949077.72 1.064
2008-2009 47702379.42/47266510.42 1.009
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RESULT :-
In the year 2007-08 the company is having the Operating Leverage 1.064 & in
2008-09 it is lowered down to 1.009 this is due to behavior of the variable cost
with respect to fixed cost.
Calculation of Degree of OperatingLeverage
The formula for computing the Degree of Operating leverage is given below:
Percentage Change in profit
Degree of operating leverage =
Percentage Change in sales
Percentage change in Operating profit =
= [47266510.42 4949077.72] = 855.06%
4949077.72
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Percentage change in Sales =
= [100940319.00 71442096.00] = 41.29%
71442096.00
855.06
Degree of operating leverage =
41.29
= 20.71
RESULT :-
The Degree of Operating Leverage is lowered down due decrease in operating
leverage i.e., 20.71 .
Calculation of Financial Leverage
The formula for computing the Financial leverage is given below:
Operating Profit
Financial leverage =
Profit Before tax
FOR THE YEAR CALCULATION RESULT
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2007-2008 4949077.72/3548499.72 1.395
2008-2009 47266510.42/46243373.06 1.022
RESULT :-
In the year 2007-08 the company is having the Operating Leverage 1.395 & in
2008-09 it is lowered down to 1.022 this is due to increase in the fixed cost.
Calculation of Degree of Financial
LeverageThe formula for computing the Degree of Operating leverage is given below:
Percentage Change in Taxable income
Degree of Financial leverage =
Percentage Change in Operating income
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Percentage change in Taxable income=
= [46200963.06-3522965.00] = 1211.42%
3522965.00
Percentage change in Operating income =
= [47266510.42 4949077.72] = 855.06%
4949077.72
1211.42
Degree of operating leverage =
855.06
= 1.42
RESULT :-
Degree of Financial Leverage is Exists & favourable for the company as it is
above one i.e., 1.42 .
Calculation of Combined Leverage
The formula for computing the Combined Leverage is given below:
Contribution
Combined Leverage =
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Profit Before tax
FOR THE YEAR CALCULATION RESULT
2007-2008 5268162.72/3548499.72 1.485
2008-2009 47702379.42/46243373.06 1.032
RESULT :-
In the year 2007-08 the company is having the Combined Leverage 1.485 & in
2008-09 it is lowered down to 1.032 this gives how the risk bearing for the
company is lowered down.
Calculation of Profit Volume Ratio
The formula for computing the P/V ratio is given below:
Contribution
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P/V Ratio =
Sales
FOR THE YEAR CALCULATION RESULT
2007-2008 5268162.72/71442096.00 0.0737 OR 7.37%
2008-2009 47702379.42/100940319.00 0.4726 OR 47.26%
RESULT :-
As comparing the PVR of the year 2007-08, it is found that the PVR is highly
increased in the year 2008-09 the reason behind this high increase in sales
volume.
Calculation of Break-Even-Point (insales)
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The formula for computing the Break-Even Point is given below:
Total Fixed cost
B.E.P. (in sales) =
Profit Volume ratio
FOR THE YEAR CALCULATION RESULT
2007-2008 319086.00/0.0737 4329525.10
2008-2009 435869.00/0.4726 922278.88
*Can not calculate BEP in unit as annual production is notavailable.
RESULT :-
As comparing the BEP of the year 2007-08, it is found that the BEP is
decreased in the year 2008-09 These is due to Increase in fixed cost.
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Calculation of Margin of Safety
The formula for computing Margin of safety is given below:
Margin of Safety = Actual Sales Sales at BEP
FOR THE YEAR CALCULATION RESULT
2007-2008 71442096.00 - 4329525.10 67112570.90
2008-2009 100940319.00 - 922278.88 100018040.12
RESULT :-
As comparing the Margin of safety of the year 2007-08, it is found that the
Margin of safety is increased in the year 2008-09 as the sale is increasing.
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Profit Percent of Sales
FOR THE YEAR CALCULATION RESULT
2007-2008 (3522965.72/71442096.00)*100 4.93%
2008-2009 (46200962.06/100940319.00)*100 45.77%
RESULT :-
As comparing the Profit percentage with sale of the year 2007-08, it is found
that the Profit is increased in the year 2008-09 this due to increase in the
output.
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Conclusion &
Recommendationsof Study
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CONCLUSIONS & RECOMMENDATIONS OFSTUDY
From the above study we bring the following conclusions:-
The Operating leverage of the company is under favaourable condition
as the degree of the operating leverage is lowered this defines that the
risk of the company is low. As the Degree of operating Leverage is high
then the small change in the sales will have large effect on operating
income.
The financial leverage of the company is exists as more than one. The
Financial leverage is lowered down therefore the financial risk is also
low. Also the company is not earning the interest so the Financially
company is under favourable condition.
Composite Leverage also at the better position as it is providing good
relationship between revenue on account of sale.
The output of the production at each level is increasing every year that
is the reason behind increase in the profit of every year.
Output growth is more than the increase the fixed cost that is also one
of the reasons for increase in profit every year.
Profit Volume Ration of the company is increasing every year increase in
profit.
Break-Even Point is act as the Red Signal Point. Break-Even Point of
company is also increasing every year due to
o Increase in the output.
o Increase in the profit.
Margin of safety of the company is at the good position as it is
increasing at every year.
All the Cost analysis for company is states that the company is at good
position.
The company has greater future prospective for expansion.
Company profitability providing good return to their owners.
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The profit generated by company profit is effectively invested in the
company in order to expand business.
SUGGETIONS
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TO COMPANY
Suggestions to Company
From the above study we bring the following suggestions:-
The Profit should maintain along with the sale so that the risk
associated to that can be identified.
The company should increase the investment.
The assets of company should be increased.
The financial stability should be attained so the company should not
have to take loan from others.
The company should apply the automated networking structure at mine
level that may help to give effective & faster work.
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APPENDICES
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Manufacturing & Profit & Loss Account forthe year ended 2007-08
M/S VIDARBHA LIQUOR CORPORATION
MANUFACTURING TRADING ACCOUNT FOR THE YEAR ENDED
31ST MARCH, 2008
PARTICULARS AMOUNT AMOUNT PARTICULARS AMOUNT AMOUNTTo Opening stock offinished goods
To CONSUMPTIONP.MATERIAL
Opening stockAdd: Purchase
Less: Discount
Less: Closing stock
To CONSUMPTIONR. MATERIALOpening stockAdd: Purchase
Less: Closing stock
To DIRECTEXPENSESFreight/Octroi/LoadingTransport & SubsidySalary & wages
Water charges
To Gross profit--------------------------
Carried Forward
1413542.6236335879.1
237749421.7
49.00
37749412.74
1385324.44
204617.3822437903.0
022642520.3
8505761.40
1718033.001131500.00332144.00
31540.00
0.00
36364088.30
22136758.98
3213217.00
10325751.7
2
By SalesLess: Ex. Duty
collectedLess: sales tax
collectedLess: TCS collected
Less: Discount
Allowed
By Closing stock----------------------
Finished Goods
228616133.00
118038960.0
0
37896209.001238868.00
71442096.00
0.00
71442096.00
597720.00
TOTALRS. 72039816.0
0
TOTAL RS. 72039816.00
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To depreciationTo Net profit
690262.003430421.35
TOTAL RS. 10325751.72 TOTAL RS. 10325751.72
Manufacturing & Profit & Loss Account forthe year ended 2008-09
M/S VIDARBHA LIQUOR CORPORATION
MANUFACTURING TRADING ACCOUNT FOR THE YEAR ENDED31ST MARCH, 2009
PARTICULARS AMOUNT AMOUNT PARTICULAR AMOUNT AMOUNT
To Opening stock offinished goodsTo CONSUMPTIONP.MATERIAL
Opening stockAdd: Purchase
Less: Closing stock
To CONSUMPTIONR. MATERIALOpening stock
Add: Purchase
Less: Closing stock
To DIRECTEXPENSES
Freight/Octroi/LoadingSalary & wagesWater charges
To Gross profit--------------------------
Carried Forward
1385324.4449024146.6
650409471.1
0
2785264.00
505761.40
40502375.00
41008136.40
881629.00
2918564.00
297406.0049324.00
597720.00
47624207.10
40126507.40
3265294.00
10004365.50
By SalesLess: Ex. DutycollectedLess: sales tax
collectedLess: TCScollected
Scrap sale
By Closing stock----------------------Finished Goods
310350333.00
156439237.0
0
51446872.00
1669097.00
145192.00 100940319.00
677775.00
TOTAL
RS.
101618094.0
0
TOTAL RS. 101618094.00
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M/S VIDARBHA LIQUOR CORPORATION
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH,
2008
PARTICULARS AMOUNT AMOUNT PARTICULARS AMOUNT AMOUNTTo advertisementTo Bank Commi. &
Int. ChargesTo Bank Interest
To Buil. Repair &maint.
To charity & donationTo conveyance
To corporation taxTo electricityTo emp. Stateinsurance a/c
To Financial chargesTo generator fuel, rentTo insuranceTo Interest
To Interest on VATTo license & othersTo machinery repairs& maintenance
To Mah. Labour wel.f.To Misc. ExpensesTo NIT ground rentTo postage
To printing &stationary
To PF a/c
To repairs & maint.To salary a/cTo sales promotion
To sales taxTo samp. & chem..anaTo state Ex. Escortcharges
To state Ex. ChargesTo sundry exp.To telephone exp.To transportation
10456.0058718.36
862713.0069711.00
10401.00874481.00
25278.00172810.00
27977.0099084.52
147855.0052338.00
61079.0040627.62
2084050.00
By Gross Profit----------------------
Brought downBy discount on
tankerBy interest on FDR
By sales tax refund
10325751.72
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To travellingTo vehicle exp.To weight & measure
To depreciationTo Net profit
TOTAL RS. 10325751.72 TOTAL RS. 10325751.72
BIBLIOGRAPHY
BOOKS :-
o Essentials of Management Accounting
By Dr. P.N. Reddy
o Corporate Accounting
By K.S. Raman
o Management Accounting
By R.S.N. Pillai & Bhagawati V.
o Research Methodology
By V.S. Dessai
o Annual report of MOIL 2006-07
o Corporate Finance of YCMOU
o Annual report of MOIL 2007-08
o Annual report of MOIL 2006-09
WEB-SITES :-
o www.google.com
o www.bing.com
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o www.wikipedia.com
o www.moil.org.in
o www.investopedia.com
o www.schandgroup.com
o www.yahooanswers.com