Fair Shilpa

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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-analysis


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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


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



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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


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


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


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


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


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


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


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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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



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

Documents

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