TWO MARK QUESTIONS AND ANSWERS

UNIT – I

INTRODUCTION

1. Define Managerial Economics

By combining the basic definition of the two terms “Manager” and

“Economics” you get the definition of “managerial economics” . “Managerial

Economics” is the study of directing resources in a way that it most efficiently achieves

the managerial goals.

Managerial Economics is also the application of the tools of economics

analysis in decision making in actual business situations.

2. Define Economics.

Adam smith’s Wealth definition - Economics as the science of

wealth .Economics lays down the principles to make the people and the sovereign rich .

The science provide ways and means of getting plentiful revenue to the state and more

property the people .

Marshall’s Welfare definition – A study of mankind in the ordinary business life . It

examines that part of individual and social action which is most closely connected with

the attainment and with the use of material requisites of well being

Lionel Robbin’s Scarcity definition - Economics as a science which studies human

behavior as a relationship between ends and scarce meas which have alternative use

3. What is Business Decision Making?

Business Decision Making involves choices between various courses of actions and

these choices must be made in the environment over which the decision maker has

limited or even no control. Such conditions of the environment are called states of nature.

Normally business decisions have to be taken very clearly otherwise the decision maker

has to face some consequences.

4.What is marginal analysis ?

Marginal analysis is the analysis of the benefits of costs of the marginal units of the

input and output. This is a technique widely used in business decision making and ties

together much of economic thought . To do a marginal analysis we have to change

variable such as quantity of good that the firm buys, the quantity of the output they

produce , the quantity of an input they used and ( these variable are usually refereed they

as control variables )

5. State the Law of Diminishing Marginal utility.

Law of diminishing marginal utility states that with successive increases in the

units of consumption of a commodity, every additional unit of that commodity gives

lesser satisfaction to the consumer. Consumption beyond point of satiety i.e.., maximum

satisfaction only yields negative marginal utility.

6.What is Equi-marginal utility?

A consumer maximizes his total utility by allocating his income among goods and

services(including savings) available to him in such a way that the marginal utility per

rupees worth of one good equals the marginal utility per rupee’s worth of any other good.

7. What is meant by Micro economic analysis ?

Micro economic analysis deals with the problems of an individual firm,

industry or consumer etc. It helps in dealing with issues which go on within the firm such

as putting the resources available with the firm to its best use, allocating resources within

various activities of the firm to its best use, allocating resources within various activities

of the firm and also deals with being technically and economically efficient.

8. What is meant by Prescriptive approach ?

Prescriptive approach described in terms and conditions

Prescriptive or normative approach tells “How things ought to be done”.

9. What is meant by descriptive approach ?

Descriptive approach describes in user friendly manner

Descriptive approach tells “how things are done”.

10. Scope of Managerial Economics:

The following aspects constitute the scope of managerial economics:

1. Objectives of a business firm

2. Demand analysis and forecasting

3. Cost analysis

4. Production management

5. Supply analysis

6. Pricing decisions, policies and practices

7. Profit management

8. Capital budgeting and investment decisions

9. Decision theory under uncertainty

10. Competition

11. Give the Objectives of a business firm

The objectives of a business firm may be varied. Apart from generating profits a

firm has many other objectives like being a market leader , being a cost leader, achieving

superior efficiency, achieving superior quality, achieving superior customer

responsiveness etc.

12. What is meant by Supply Analysis?

Supply analysis deals with the various aspects of supply of a commodity. Certain

important aspects of supply analysis are supply schedule, curves and function, elasticity

of supply, law of supply and its limitations and factors influencing supply.

13. What is meant by Capital Budgeting ?

Capital budget is meant by the planning of expenditure on assets. The term

'Capital Budgeting' is used interchangeably with capital expenditure management, capital

expenditure decision, long term investment decision, management of fixed assets, etc. It

may be defined as "planning, evaluation and selection of capital expenditure proposals."

Capital budgeting involves a current outlay or serves as outlays of cash resources in

return for an anticipated flow of future benefits

14. Use of Engineering Economics:

Engineering economics accomplishes several objectives. It presents the aspects of

traditional economics that are relevant for business and engineering decision making in

real life.

15. Define Logistics:

Logistics is defined as the movement of goods from one place to the other.

16. Define Inbound Logistics:

Inbound logistics is defined as the movement of raw materials to the factory

premises.

17. Define Outbound logistics:

Outbound logistics is defined as the movement of finished goods to wholesaler or

retail outlets and to the final consumers.

18. Define Statistics:

Statistics provide the basis for empirical testing of theory. Generalizations or

theory cannot be accepted for practice unless these theories are checked against the data

from the reality. This way, theories become more practical and useful in real life business

situation.

19. Define Economics and define the divisions of Economics:

Economics has two divisions namely micro economics and macro economics.

Micro economics is the branch of economics where the unit of study is an individual or a

firm while macro economics is branch of economics where the unit of study is

aggregative in character and considers the entire economy.

20. Define Accounting:

Accounting can be defined as the recording of financial operations of an

organization. Managerial decisions on profits and sales etc. derive input largely from the

accounting statement of a firm.

21. Define Managerial Economics and Mathematics:

Many of the theories in mathematics will find use in economics. Concepts such as

calculus, vectors, logarithms and exponentials, determinants and matrix, algebra etc are

some to name a few. Managerial economics is metrical in character. It estimates various

economic relationships prediction relevant economic quantities and uses them in decision

making and planning for the future. So mathematics becomes an important tool in

managerial economics.

22. Define Operations research:

Operations research was developed as science during the Second World War to

solve the complex operations problems of planning and resource allocation in defence

and in basic industries which specifically supplied military equipments. These theories

find high usage in various field of management to solve problems pertaining to logistics,

both inbound and outbound and also the movement of material within the factory

premises etc.

23. Define a competitor.

The competitors of the firm are also likely to react or even pro-act to any decisions made

by the firm. Competitors always try to navigate the competitive advantage gained by the

firm. Thus managers will have to make wise investments in projects that will be hard to

be imitated by the competition.

24. Define Decision theory under uncertainty:

Most of the business decisions taken by the managers are done under

uncertainty. Uncertainties pertaining to demand, cost, price, profit, capital etc prevail

most of the time when decisions are made. This makes the whole decision making

process difficult and complex. The tools used in economic analysis have been modified

and refined so as to take into account the uncertainty and thus help decisions making in

logical and scientific manner.

25. Define Profit Management:

All business firms are motivated and committed to produce profits. Profits are one

of the tangible yardsticks to measure the performance of the firm and the managers

concerned. It also signifies the health of the firm. Profits are influenced by various factors

such as cost of production, revenues and other factors both internal and external to the

firm. Profits are hard to predict.

26. Define Pricing Decisions

A firm’s profitability and success greatly depend on the pricing decisions and the

pricing policies of the firm. The patronization of the firm’s products by the customers, the

competition faced by the product along with the profits of the firm, largely depends on

the price of the product. Pricing also depends on the environment in which the firm

operates, competitions, customers etc.

27. Define Production Management:

When a manager organizes and plans the firm’s production functions i.e. when he

tries to convert the raw materials to finished product, he faces a number of economic

problems. The study of ‘production function’ describes the input output relationship.

28.Define Cost Analysis:

Cost analysis is defined as onee way to earn higher profits is by controlling the

cost involved in producing the product. Study of cost is necessary for making efficient

and effective managerial decisions. If a detailed cost analysis and estimation is done, the

firm can move upon effective profit management and sound pricing practices.

29.What are the Macro economic Conditions:

The macro economic conditions are as follows

(a) The economy in which firms operate is predominantly a free enterprise

economy.

(b) The present day economy is undergoing rapid technological and

economic changes and,

(c) The government intervening in the economic affairs has increased in

the recent times and is likely to go up further.

30. What are the Common points in Managerial Economics ?

1.Managerial economics deals with the decision making by managers, executives

and engineers of economic nature.

2.Managerial economics is goal oriented.

3.Managerial Economics is both conceptual and metrical.

4.Managerial economics is pragmatic.

UNIT – II

DEMAND AND SUPPLY ANALYSIS

1.Define Demand.

Demand id defined as it indicates the quantities of products (goods service) which

the firm is willing and financially able to purchase at various prices, holding other factors

constant.

2. What are the types of Demand?

Demand for any commodity is determined by its nature. Demand for such

commodities which are essential for the consumer is unaffected significantly by changes

in their market conditions. We can classify the Demand into following types.

Demand for consumer’s and producer’s goods.

Demand for perishable and durable goods

Derived and autonomous demands.

Firm and Industry demands

Demands by total market and market segments

Short term and long term demand.

3. Define Demand for Consumer’s and producer’s goods.

The consumer’s goods are goods used for final consumption. Demand for

consumer’s goods are also termed as direct demand, and these goods are used directly for

final consumptions.

Example – Food items, readymade dresses, houses, etc..,

The producer’s goods are used for production of other goods. Demand for

producer’s goods is termed as derived demand, for these goods are demanded not for

final consumption but for the production of other goods.

Example - Machines, Tools, Raw Materials, etc..,

4. Define Determinants of Demand:

An individual’s demand for a commodity depends on his desire and capability to

purchase it. Apart from the desire to purchase, there are many other factors which

influence the purchase of a product (demand). These are known as demand determinants.

5. What is meant by Tastes and preferences of Consumers?

The change of tastes and preferences of consumers in favor of a commodity will

result in a greater demand for the commodity. The opposite also holds good i.e. if the

tastes and preferences of consumer change against the commodity, the demand will

suffer.

6. What are the two kinds of Consumers expectations?

Consumers have two kind of expectations one pertains to their future income and

the second is related to the future prices of the goods and its related goods.

7. Define Advertising

Advertisements provide information about the presence of quality products in the

market and induces customer’s to buy more. It also promotes the latest preferences of the

general public to masses.

8. Define the Law of Demand

The Law of Demand states that “The amount demanded of a commodity increases

when there is a fall in price, and the amount demanded of a commodity diminishes at the

time of rise in prices”. That is if the price of the good increases its quantity demanded

decreases, while if the price of the good decreases its quantity demanded increases.

The relation of price to quantity demanded / sales is known as the law of demand.

Law of demand states that the higher the price is the lower the demand is and vice versa,

holding other factors as constant.

9. Explain the assumptions in Law of Demand.

The law of demand is based on certain assumptions:

There is no change in consumer’s tastes and preferences.

Income should remain constant.

Prices of other goods should not change.

There should be no substitutes for the commodity.

The commodity should not confer any distinction.

The demand for the commodity should be continuous.

People should not except any change in the price of a commodity

10. Define the price quantity relation.

The price quantity relation is defined and can be expressed as demand being a

function of price

D=f(p).

11. What Highlights of the law of demand?

The highlights of the law of demand are as follows

1. The relationship between price and quantity demanded is inverse.

2. Price is the independent variable and demand the dependent variable.

3. Law of demand assumes that except for price and demand, other

factors remain constant.

12. What is Demand Shift: (Change in demand)?

Factors shift the demand for a particular product either on the right side of

the demand curve or to the left side of the demand curve based on the changes in price.

These factors, other than the price of a good that influence demand are known as demand

shifters. The shift in the demand either to the left or right is called the demand shift.

13. What are the Exceptions to law of demand?

The exceptions to law of demand are as follows

1. In share markets on would have noticed that the rise in price of the

shares increases, the sales of the shares while decrease in the price of

the shares results in decrease of sale of the shares.

2. Some goods which act as status symbol and have a snob appeal fall

under this category. Here when the price of the product rises then the

appeal of the product also rises and thus the demand. Some example

are diamonds and antiques.

3. Finally, ignorance on the part of the consumer may cause the

consumer to buy at a higher price, especially when the rise in price is

taken to mean an improvement in quality and a reduction in price as

deterioration in quality.

14. Define Individual demand

Individual demand is defined as “the quantity of a product demanded by an

individual purchaser at a given price is known as individual demand.”

15. Define Market demand

Market demand is defined as “the total quantity demanded by all the purchasers

together is known as the market demand.”

16. What are the types of Demand function?

The types of demand function are as follows

1. Consumption function

2. Product consumption function

3. Differences in regional incomes

4. Income expectation and demand

17. What are the Characteristics of demand function ?

The characteristics of demand function are as follows

1. The long run relationship between consumption and income is some

what stable, and expenditure on consumption is usually about 85 to

90% of the income.

2. The consumption function is highly unstable in short runs and the

relationship between income and consumption cannot be predicted by

any mathematical formula.

3. During the periods of economic prosperity, there is an absolute

increase in the expenditure on consumption, but decrease as a

percentage of income during periods of depression, the consumption

declines absolutely but the expenditure on the consumption increases

as a percentage of income.

4. In the periods of economic recovery, the rate of increase in

consumption is higher than the rate of the decline in consumption in

times of recession.

18. Define Product consumption function

Production function can be defined as the relationship between the total

income of the consumer and sales of particular products. It means that when there is a

change in income there is a change in the demand for particular products.

19. Define Income expectations and Demand

Expectations are related to people’s estimates of the level and durability of

the future economic conditions. The demand for many consumer durables (household

appliances like TV, Washing machine, etc) is often sensitive to general expectations

regarding income level.

20. What are the features of advertising demand relationship ?

The features of advertising demand relationship are as follows

1. Even when there is no advertising effort done, there will be a certain

amount of sales possible for a particular product by virtue of its

presence in the market.

2. There is a direct relationship between advertising and sales. Thus

when there is an increased spending on advertisements. It will bring in

more sales.

3. Increase in advertisements will lead to more than proportionate

increase in sales only to a point. After that any increase in

advertisement will have only less than proportionate effect on sales.

21. Define Elasticity of Demand:

Elasticity of demand is defined as ‘the percentage change in quantity demanded

caused by one percent change in the demand determinant under consideration, while

other determinants are held constant’.

The formula for finding the EOD is

Percentage change in the quantity demanded of good X

Ed = Percentage change in determinant Z

22. Define demand determinant

Demand determinant is defined as the degree of change in demand to the degree

of change in any of the demand determinants.

23. What are the Various Elasticity?

The various elasticizes are as follows

1. Price elasticity of demand

2. Income elasticity of demand

3. Cross elasticity of demand

4. Promotional elasticity

5. Exportations elasticity of demand

24. Define Price Elasticity of Demand

Price elasticity of demand can be defined as “the degree of responsiveness

of quantity demanded to a change in price”.

25. What are the Types of price elasticity

The types of price elasticity are as follows

1. Perfectly elastic demand

2. Absolutely inelastic demand or perfectly inelastic demand

3. Unit elasticity of demand

4. Relatively elastic demand

5. Relatively inelastic demand

26. Define Absolutely inelastic demand or perfectly inelastic demand (ep=):

Absolutely inelastic demand is defined as a change in price howsoever large,

causes no change in the quantity demanded of a product. Here, the shape of the demand

curve is vertical.

27. Define Relatively elastic demand (ep>1):

Relatively elastic demand is defined as a reduction in price leads to more than

proportionate change in demand. Here the shape of the demand curves in flat.

28.What are the Factors determining price elasticity of Demand ?

The elasticity of demand depends on the following factors namely

1. Nature of the product

2. Extent of usage

3. Availability of substitutes

4. Income level of people

5. Proportion of the income spent of the product

6. Urgency of demand and

7. Durability of a product.

29. Give short note on Derived and Autonomous Demand.

When the demand for a product is tied to the purchase of some parent

product, its demand is called as Derived.

For Example

Demand for cement is a derived demand since it is needed for its own sake but for

satisfying the demand for buildings.

An autonomous demand for a commodity is one that arises on its own out of a

natural desire to consume or possesses a commodity. Autonomous demand is

independent of the demand for any other commodity.

For Example

The demand for commodities which arises directly from the biological or physical

needs of human beings like food, dresses, shelter, etc..,

30. Define Demand Schedule.

Demand Schedule is a list of quantities of a commodity purchased by the

consumer at different prices. The Law of Demand may be explained with the help of

Demand Schedule.

The following table shows the demand schedule of commodity X

When the price falls from Rs 10 to Rs 8, quantity demanded increases from 1 to 2 in the

same way as price falls, quantity demanded increases.

31. What is Demand Forecasting? What are its types?

A forecast is a prediction or estimation of future situation. Since the future is

uncertain no forecasts can be 100% accurate and current data. Here the forecast has been

made about the demand conditions for the particular commodity.

32. What are the Types of Forecast?

The types of forecast are as follows

Passive Forecast

Active Forecast

Long term Forecast

Short term forecast

1. Passive Forecast- It predict the future situation in the absence of any action by the firm.

2. Active Forecast- It estimate the future situation taking into account the likely future

actions of the firm.

Price of X (Rs) Quantity Demanded

10

8

6

4

2

1

2

3

4

5

3.Short term forecast – Usually made for a period upto one year . It made in order to

know the effect of current policies of the firm .Made for the established products of the

firm

4. Long term Forecast- Relates to the production for a year or more . It is usually made

when a new product has to be launched

33. What are the steps involved in scientific approach to Forecasting?

The following steps constitute a scientific approach to Demand forecasting.

Identify and state the objectives of forecasting clearly.

Select appropriate method of forecasting in the right of objectives.

Identify the variables affecting demand for the given product or service.

Express these variables in appropriate form

Collect the relevant data to represent the variables

Determine the most probable relationship between the dependent and independent

variables.

Make appropriate assumptions to forecasts and interpret

34. Explain the criteria for the choice of good forecasting method.

The following criteria have to be followed while choosing the forecasting method.

They are

The result achievable by a forecasting method must be weighted against the cost

of the method

The use to which the forecast can be made should be well understood. Infact, it is

not a question of results achievable but results achieved by forecasting method.

It is quite easy to judge the existing trend. But for a good forecast it is necessary

that it should also predict deviations and turning points so that the forecasts are

more effective.

There is a time gap between the occurrence of an event and it forecast- known as

the lead time.

UNIT III

PRODUCTION AND COST ANALYSIS

1. Say some of the main cost concepts.

The cost concepts are as follows

1) Actual costs and opportunity costs

2) Incremental costs and sunk costs

3) Explicit costs and implicit costs

4) Past costs and future costs

5) Accounting costs and economic costs

6) Direct cost and indirect cost

7) Private costs and social costs

8) Controllable costs and non controllable costs

9) Replacement costs and original costs

10) Shutdown costs and abandonment costs

11) Urgent costs and postponable costs

12) Bussiness costs and full costs

13) Fixed costs and variable costs

14) Short run and long run costs

15) Incremental costs and marginal costs

2. What are actual costs and opportunity costs ?

Actual costs which a firm incurs for producing or acquiring a product or a

service. As example for this is the cost on raw materials, labor, rent, interest.

3. What are incremental costs and sunk costs ?

Incremental cost is the additional cost due to change in the level of nature

or business activity. Sunk costs are the costs that are not altered by a change in

quantity produced and cannot be recovered.

4. What are Explicit costs and implicit costs ?

Explicit or paid out costs are those expenses which are actually paid by the

firm. Implicit costs are the theoretical costs in the sense that they go unrecognized

by the accounting system.

5. What are past costs and future costs ?

Past costs are the actual costs incurred in the past are generally contained

in the financial accounts. Future costs are costs that are expected to occur in some

future period or periods.

6. What are accounting costs and economic costs ?

Accounting costs are the actual outlay costs. Economic cost relate to the

future

7. What is direct and indirect cost ?

Direct cost are traceable cost or assignable cost are the ones that have

direct relationship with a unit of operation like a product, a process or a product,

or a department of the firm. On the otherhand, indirect costs or non traceable costs

or common or non assignable costs are the costs whose course cannot be easily

and definitely traced to the plant.

8. What are private costs and social costs ?

Private costs are those which are actually incurred or provided for the

business activity by an individual or the business firm. Social costs on the

otherhand are the total costs to the society on account of production of a good.

9. What are controllable and non controllable costs ?

Controllable costs are those which are capable of being controlled or

regulated by the managers ant = d it can be used to assess the managerial

efficiency in controlling the cost in his department. Non controllable costs are

those which cannot be subjected to administrative controls and supervision.

10. What are replacement costs and original costs ?

Original costs or the historical costs are the costs paid for assets such as

land, building, cost of plant, equipment and materials. Replacement costs are the

costs that the firm incurs if it wants to replace or acquire the same assets now.

11. What is shut down cost and abandonment cost ?

Shutdown costs are costs in which the firm incurs if it temporarily stop its

operation. Abandonment costs are the costs of retiring altogether a fixed asset from use.

12. What are incremental cost and marginal cost?

Incremental cost is important when dealing with decisions where discrete

alternatives are to be compared. Marginal cost deals with unity unit output.

13 What are the determinants of cost?

The determinants of the cost are as follows

1) level of output

2) price of inputs.

3) size of plant

4) output stability

5) production lot size

6) level of capability utilization

7) technology

8) learning effect

9) breadth of product range.

10) geographical location

14. What are the two aspects in cost output relationships?

The following are the ascepts in cost output relationship

1) cost output relationship in short run.

2)cost output relationship in long run.

15. What are the terms involved in cost output relationship?

The following are the terms involved in cost output relationship

1) Average fixed cost.

2) Average variable cost.

3) Average total cost.

16. What is level of capacity utilization?

The level of capacity is defined as follows. The higher the capacity utilization

fixed cost per unit of output in bound to be low.

17. What is output stability?

Stability of output leads to savings in various kinds of hidden cost interruption

and learning.

18. What is size of plants?

Production costs are usually lower in bigger plants than smaller plants.

19. What is cost?

Cost is the money spent on producing and selling a product to the customers.the

cost of a product starts from the raw materials through production costs till selling costs

include the cost in maintaining outlets.

20. What is the significance of cost in managerial decision making?

Study of costs is essential for making a choice from among the competing

production plans. Production decisions are not possible without their respective cost

considerations.

21. What is price of input?

If the price of the raw materials labor, power increases then naturally the cost of

production goes up. This cost of productions varies directly with the prices of inputs.

UNIT-IV

PRICING

1. What is Price Determination?

A firm cannot arbitrarily fix the price of its products to achieve its objective of

maximizing profit. There can be only one optimal price for a product that can

maximize the profit, under a given set of conditions.

The price is generally different in different kinds of markets, depending on the

level of competitions between the sellers.

The sellers should not charge the price for their products as they like.

2. What are the determinants of Pricing?

The following are the factors that determine the price of a commodity:

The demand

Cost of Production

Objectives of its producers

Nature of the competition

Government policy

3. Explain the meaning of Production.

Production is an activity that transforms inputs into output. Production is any

activity that increases consumer usability of goods and services thus production consists

of producing , storing and distributing tangible of goods and services

For example : A sugar mill uses such inputs as labour, raw material like sugarcane

and capital invested in machinery, factory building to produce sugar.

4. Explain short run and long run production

Short run production

The short run is that period of time in which some of the firm’s inputs are fixed –

these fixed inputs act as a limiting factor on change in output. In the short run at least one

of the inputs remains constant , while the other inputs are vary in nature. Simply, if the

firm uses more then two inputs but only two of them are variable and other is fixed is said

to be short run

Long run

The long run term is that period of time in which there are no limiting factors on

output change. In long run all the variables are variable in nature and there is no fixed

input like short run . Simply, if the firm uses only two inputs and both of them variable in

nature is said to be long run.

5. Define Production function with its assumptions.

The production function is purely a technological relationship which expresses the

relation between output of a good produced and the different combinations of inputs used

in its production. It means the maximum Amount of output that can be produced with the

help of each possible combination of inputs. The production function can be

mathematically written as

Q= F(L,N,K…..)

Assumptions :

1. technology is invariant

2. Production function includes all the technically efficient methods of production

6. Define law of variable propositions .

The law of variable propositions states that as more and more of one factor input

is employed , all other input quantities held constant , a point will eventually be reached

where additional quantities of the varying input will yield diminishing marginal

contributions to total product This law is also called as law of diminishing marginal

returns

7. Define Isoquant with its types

An Isoquant is a curve representing the various combination of two inputs that

produce the same amount of output . An Isoquant is defined as curve which shows the

different combinations of the two inputs producing a given level of output.

Types :

1. Linear Isoquant

2. Input- output Isoquant

3. Kinked Isoquant

4. Smooth convex Isoquant

8. What do you mean by Return to Scale ?

The percentage increase in output when all inputs vary in the same proportion is

known as returns to scale. Obviously return to scale relate to greater use of inputs

maintaining the same technique of production

1.Write Cobb- Douglas production function and its properties.

The production function suggested by C.W.Cobb, was of the following form :

Q=ALb kl-h

Where Q = Total output

L = Units of labour

K = Units of Capital

A = a constant

B = a parameter

9. What are the two factors in pricing strategies?

The following are the factors in pricing strategies

1) External factors

2) Internal factors

10. What are the external factors in pricing strategies?

The external factors in pricing strategies are as follows

The competition in the market

The elasticity of supply and demand

Trends of the market

purchasing power of buyers.

government policies towards prices.

11. What are the two factors in pricing strategies?

The factors in pricing strategies are as follows

1) The costs

2) Management policy towards the gross margin and the sales turnover

12. What are the determinants?

The determinants are as follows

objectives of business

competition

product and promotional strategies

Nature of price sensitivity

influence of middle men

Reutilization of pricing

Government regulation

13. What are objectives of business?

The fundamental objective of a firm is to survive in the business and then thrive.

The pricing strategy adopted by a firm is very much by these factors.

14. What is competition in pricing strategy?

To come out with a pricing policy that will be advantages to the firm, managers

require a perfect understanding of the competitive environment in which the firm is

placed.

15. What are product and promotional strategies?

The product and promotional strategies are as follows

i. product itself

ii. pricing

iii. promotion activities

iv. distribution of products through the channel to the consumer.

16. What is nature of price sensitivity?

We know that many factors contribute to the increase of price sensitivity, but

managers should not ignore the factors that minimize price sensitivity .when designing

pricing strategies.

17. What is influence of middlemen?

Middlemen are the ones who stock the finished product of the manufacturer to sell it to

the customers. These are also called the channel for distribution.

18. What is routinization of price?

This strategy of pricing relies on the tried and trusted pricing strategies which the

organization has followed all along. This pricing practice is often routinized but the

extend varies from company to company and from product to product.

19. What is the government regulation in pricing?

In order to safeguard the interests of the public the government acts on their

behalf to prevent the abuse of the monopolistic power and collusion among business.

20. Say some of the objectives of the pricing policy?

Objectives of pricing policies are as follows

i. profit maximization.

ii. long term welfare of the firm.

iii. facing competition.

iv. flexibility to economic changes.

v. satisfying rate of returns.

21. What are the cost oriented pricing method?

The cost oriented pricing method are as follows

i. cost plus pricing or full cost pricing.

ii. Marginal cost pricing or incremental or direct cost pricing.

iii. Target pricing or rate pricing.

iv. programmed pricing.

22. What are the competition oriented pricing method?

The competition oriented pricing methods are as follows

i. going rate pricing.

ii. Loss reader pricing.

iii. Customary pricing.

iv. Price leadership pricing.

v. Trade association pricing.

vi. Cyclical pricing.

vii. Imitative pricing.

viii. Turnover pricing.

23. What are the praising based methods?

The following are the praising based methods are as follows

i. Administered pricing.

ii. Dual pricing.

iii. Price discrimination or differential pricing.

24. What are cost oriented pricing methods?

The cost oriented pricing methods are as follows

i) cost plus.

ii) marginal cost pricing.

iii) target pricing

25. What is going rate pricing method?

In going rate pricing the emphasis is on the market situation unlike the full cost

pricing where the emphasis was on costs.

26. What is leadership pricing method?

The pricing strategy is widely used in retailing business. Because the names have

the word loss in it this policy may be confused with the pricing which results in losses.

This is known as leadership pricing methods.

27. What is customary pricing method?

In case of some products their prices get more or less. This does not happen due

to deliberate action on the seller’s part but it happens as the results of the product

prevailing in the market for a long period of time. This is known as customary pricing

method.

28. What is price leadership method?

In any industry, out of all the firms operating industry, atleast one firm will have

its cost of production lower than all other firms. This is known as price leadership

method.

29. What is trade association pricing method?

The kind of pricing arises out of an unsaid understanding agreement between the

firms operating in the market.

30. What is the cycling pricing method?

The pricing method which is done to capitalize on the cycles of the season in

nature and the cycle in the economy are known as cyclical pricing.

31. What is imitative pricing method?

Imitative pricing method is very similar to the loss leader pricing method. This

pricing policy is often used in retail business.

32. What is turnover pricing method?

Turnover is the word which denotes the sales of the product. The higher the

turnover means higher the sales. This is known as turnover pricing method.

33. What is dual pricing method?

Usually the firms which produce essential commodities have part of their product

under administrating pricing and part of the product is solid in the free market. This is

known as dual pricing method.

34. What is price?

Price is the source of revenue for the firm and it decides the health of the firm.the

customer acceptance or rejection of a product is most of the time predominantly

influenced by price.

35. What are the external factors influencing the précising decision?

The factors influencing are as follows

i. The competition in the market.

ii. The elasticity of supply and demand.

iii. Trends of the market.

iv. Purchasing power of buyers.

v. Government policies towards prices.

UNIT-V

FINANCIAL ACCOUNTING

1. What is balanced sheet?

The balanced sheet provides the financial position of a company at any given

point of time.

2. Say some of the important financial statements?

Some of the important financial statements are as follows

i. profit and loss account.

ii. balance sheet.

iii. fund flow statement.

3. What are the contents of a balance sheet?

The balance sheet includes the following contents

i. assets

ii. Liabilities.

4. Say some of the types of assets?

The following are the types of assets

i. Fixed assets.

ii. Investments.

iii. Current assets.

iv. Loans and advances.

v. miscellaneous expenditure

5. What is fixed assets?

Their life period is very long; these are purchased for carrying out the operation in

a company. Using this company can generating revenue. This is known as fixed assets.

6. What is investment?

The long term and short term financial securities owned by a company comes

under this category. Here long term investments means buying shares of the other

companies.

7) What are current assets?

Any asset that can be converted into cash within one year of time is called as

current asset. They would be converted into cash at the end of the operating cycle of a

firm.

8) What are the items come under this current assets?

The following are the assets that come under current assets

i. cash.

ii. debtors.

iii. inventories.

9) What is loans and advances?

Loan is the amount that a company loans to its employees, advances given to

supplies, government contractors and other agencies it is also include prepaid expenses.

10) What are the types of liabilities?

The following are types of liabilities

i. share capital.

ii. resreves and surpluses.

iii. secured loans.

iv. unsecured loans.

v. current liabilities.

11) What is meant by share capital?

Share capital includes both equity share capital and preference share capital.

Equity share holders are the owners of a company they take risk and their dividend is not

fixed but is case of preference share capital the dividend rate is fixed.

12) What is meant by Reserves and Surpluses?

Reserves is nothing but the profit that is retained by accompany not by not paying

it as dividend to the shareholders.

13) What are the types of reserves ?

The following are the types of reserves

i. revenue reserve.

ii. caapital reserve.

14) What is meant by secured loans?

Loan amount borrowed by the firm by pledging assets (ie) securities are provided

for these loans.

15) What is meant by unsecured loans?

In this case no security is provided examples are fixed deposits, loans and

advances. This is known as unsecured loans.

16) What is meant by current liabilities?

Current liabilities consists of amount that is to the suppliers when goods are

purchased on a credit basis, advance payments received accrued expenses, provisions for

tax.

17) What is meant by income statement?

The companies act does not any particular way in which the profit and loss

account or the income statement has to be prepared. This statement reflects the

performance of a company over a period of time.

18) Who are all the users of financial statement?

The following are the users of financial statements

1. Management.

2. Shareholders, investors, analyst.

3. lenders

4. Suppliers.

5. Customers.

6. Employees.

7. Government and regularity agencies.

8. Others

19) What is meant by cash flow statement?

A firm would enter into trouble if it spends more cash than it is able to generate.

The firm should generate adequate capital for it survival. This is known as cash flow

statement.

20) How the cash flow of a business can be classified?

Cash flow of a business is classified as follows

a. operating activities

b. investing activities

c. financing activities

21) what is meant by ratio analysis?

Ratio analysis is one of the powerful tool for financial statement analysis. Ratio is

nothing but the relationship between two or more items.

22) What are the different ways of carrying out analysis?

Different ways of carrying out analysis are as follows

a. past ratio

b. competitors ratio

c. industrial ratio

d. projected ratio

23) What is meant by past ratio?

The current financial years ratios can be compared with the previous years ratio to

find whether the financial position has improved over the years or not. This

24) What is meant by competitors’ ratio?

The ratio of a company can be compared with the ratio of the competitors and

with the market leader. This is known as competitors ratio.

25) What is meant by industry ratio?

The ratios of a firm can be compared with the ratios of the industry to which the

particular firm belongs to. This is known as industry ratio.

UNIT VI

CAPITAL BUDGETING

1. What is capital budgeting?

The term 'Capital Budgeting' is used interchangeably with capital expenditure

management, capital expenditure decision, long term investment decision, management

of fixed assets, etc. It may be defined as "planning, evaluation and selection of capital

expenditure proposals." Capital budgeting involves a current outlay or serves as outlays

of cash resources in return for an anticipated flow of future benefits.

According to G. C. Philippalys, "Capital budgeting is concerned with the

allocation of firm's scarce financial resources among the available market opportunities.

The consideration of investment opportunities involves comparison of expected future

streams of earnings from a project with immediate and subsequent streams of

expenditure for it."

Lynch - "Cash budgeting consists in planning, development of available capital

for the purchase of maximizing the long term profitability in the concern."

2. What are the importance of capital budgeting?

Capital budgeting is of paramount importance in financial decision making.

Special care should be taken in making these decisions on account of the following

reasons

1. Over / Under capacity - To improve timing and quality of asset acquisition, the capital

expenditure decision must be carefully drawn. If the firm has invested too much in assets,

it will incur unnecessary heavy expenditure. If it has not spent enough on fixed assets,

two serious problems may arise

    (i) The firms equipment may not be sufficiently modern to enable it to produce

competitively.

    (ii) If it has inadequate capacity it may lose a portion of its share of market to its rival

firm. To regain lost customers it would require heavy selling expenses, price reduction,

product improvement, etc.

2. Investment decision though taken by individual concerns is one of national importance

because it determines employment, economic activities and economic growth.

3. What are the capital budgeting decisions?

The following are the capital budgeting decisions

1.Accept / Reject decision

2.Mutually exclusive project decision

3.Capital rationing decision

4. What are the Kinds of capital budgeting proposals?

1. Replacement / modification of fixed assets - e.g. worn out, obsolete are replaced

at appropriate time.

2. Expansion - involves an addition of capacity to existing production facilities.

3. Modernization of investment expenditure - they make it easier for a firm to

reduce cost and may coincide with replacement decision.

4. Strategic investment proposal - these are capital budgeting decisions which do

not assume that the return will be immediate or measured over a long period of time.

Strategic investment are defensive, offensive and mixed motive decision. The vertical

integration of a firm is an example of defensive investment in which a continuous source

of raw materials is assumed. Horizontal combinations are offensive investments for they

ensure a firm's internal and external growth respectively. Mixed motive investment are

outlays on research and development programmes.

5. Diversification of business - means operating in several markets or firm one

market into another market. It may even amount to changing product lines. ^

6. Research and development - where the technology is rapidly changing, research

and development area is a continuous activity in any firm. Usually large sums of money

are invested in research and development activities which lead to capital budgeting

decisions.

5. What are the Methods of investment evaluation or capital budgeting appraisal

methods?

There are several methods of evaluating and ranking the capital investment

proposals. The basic approach is to compare the investment of the project with the returns

derived thereof. The following are main methods generally adopted in investment

evaluation.

1. Payback period method

2. Accounting / Average rate of return

3. Discounted cash flow method / Time adjusted techniques

    (a) The present value method

    (b) Profitability index / Benefit cost ratio

    (c) Internal rate of return

6. What is Payback Method?

It is a traditional method of capital budgeting. It is the simplest and most widely

employed quantitative method for appraising capital expenditure decisions. This method

answers the question - how many years will it take for cash benefits to pay the original

cost of an investment normally disregarding salvage value. Cash benefits here represent

cash flow after tax (CFAT) technique to pay back the original outlay required in an

investment proposal.

There are two ways of calculating the payback period. The first method can be

applied when the cash flow stream is in the nature of annuity for each year of project's

life, for cash flow adjusted techniques are uniform. In such a situation the initial cost of

investment is divided by the constant annual cash flow. The second method is used when

a project's cash flows are not equal, but vary from year to year. In such a situation

payback is calculated by the process of accumulating cash flows till the time when

cumulative cash flows are equal to original investment outlay.

7. What are the Accept / Reject criterion?

The payback period can be used as a decision criterion to accept or reject an

investment proposal. One application of this technique is to compare the actual payback

period with a predetermined payback i.e., the payback set up by the management. If the

actual payback period is less than the predetermined payback, the project will be

accepted. If not, it will be rejected. Alternatively the payback can be used as a rationing

method.

When mutually exclusive projects are under one consideration, they may be

ranked according to the length of payback period. Thus the project having the shortest

payback may be assigned rank one followed in the order so that the project with longest

payback might be ranked last. The term mutually exclusive refers to the proposals out of

which only one can be accepted. Obviously project with shorter payback period will be

selected.

8. What is imitative pricing method?

Imitative pricing method is very similar to the loss leader pricing method. This

pricing policy is often used in retail business.

9. What is turnover pricing method?

Turnover is the word which denotes the sales of the product. The higher the

turnover means higher the sales.

10. What is dual pricing method?

Usually the firms which produce essential commodities have part of their product

under administrating pricing and part of the product is solid in the free market.

11. What is price?

Price is the source of revenue for the firm and it decides the health of the firm.

The customer acceptance or rejection of a product is most of the time predominantly

influenced by price.

12. What are the external factors influencing the précising decision?

The factors influencing are as follows

1. the competition in the market.

2. the elasticity of supply and demand.

3. trends of the market.

4. purchasing power of buyers.

5. government policies towards prices.

13. What is Accounting or Average Rate of Return?

Return on investment method overcomes the deficiencies of payback period

method in the sense that it considers the earnings of a project over its entire economic

life.

1. The return on investment is estimated i.e., earnings or profits estimated from an

investment proposal during its economic life, after providing for depreciation and taxes.

It means net profit from estimation are as per the accounting principles.

2. The rate of return is compared with cut off rate as determined by the management. Cut

off rate is the minimum rate of return on investment. It should be generated from a profit

which is generally the firm's cost of capital. Cost of capital 15% - cut off rate of return =

15%. The comparison helps management to rank the various projects and select the most

profitable one. If return on investment proposal is less than the cut off rate, it is rejected

and accepted if it is equal or more than the cut off rate. In case of mutually exclusive

alternative projects, the projects with higher rate of return are selected.

14. What are the Calculation - four ways / methods?

The four way of methods are as follows

(a) Total return on total investment

(b) Return per amount / rupee of money invested

(c) Average return on investment method

(d) Average return on average investment method

15. What is Discounted cash flow / Time adjusted techniques?

The distinguished characteristic of the discounted cash flow capital budgeting

technique is that they take into consideration the time value of money while evaluating

the cost and benefits of a project. In between firm or another, all these methods require

cash flows to be discounted at a certain rate of popularity called cost of capital. Cost of

capital is the minimum discount rate that must be earned on a project that leaves are

discounted to their present values only on the ground that a rupee received at a future date

is worth less than a rupee received today.

1. It takes into account all the benefits and costs occurring during the earnings for profit,

for an entire economic life of the project.

2. It takes into account the time factor while evaluating the profitability of a project, in

the sense that they recognize the fact that the value of a rupee received at a future date is

less than its present value.

3. They provide for uncertainty and risk as they recognize the time factor while

evaluating the profitability of investment proposals.

4. They are more scientific and dependable.

16. What are the Demerits of time adjusted technique?

The demerits of the technique are as follows

1. They are complicated as they involve a good amount of calculations.

2. They do not correspond to the accounting concepts while recording costs and reserves.

3. They are not suitable for ranking projects regarding different capital outlay.

17. What are the Discounted cash flow methods?

The following methods are the discounted cash flow methods

1. Net present value method

2. Present value index method

3. Discount

18. What is Net present value method?

The cash inflow in different years are discounted (reduced) to their present value

by applying the appropriate discount factor or rate and the gross or total present value of

cash flows of different years are ascertained. The total present value of cash inflows are

compared with present value of cash outflows (cost of project) and the net present value

or the excess present value of the project and the difference between total present value

of cash inflow and present value of cash outflow is ascertained and on this basis, the

various investments proposals are ranked.

Cash inflow = earnings / profits of an investment after taxes but before depreciation

The present value of cash outflows = initial cost of investment and the comment of

project at various points of time

19. What is Internal rate of return method?

The technique is also known as yield on investment, marginal efficiency

value of capital, marginal productivity of capital, rate of return, time

adjusted rate of return and so on. Like net present value, internal rate of

return method also considers the time value of money for discounting the

cash streams.

The basis of the discount factor however, is difficult in both cases. In the

net present value method, the discount rate is the required rate of return

and being a predetermined rate, usually cost of capital and its determinants

are external to the proposal under consideration.

The internal rate of return on the other hand is based on facts which are

internal to the proposal. In other words, while arriving at the required rate

of return for finding out the present value of cash flows, inflows and

outflows are not considered. But the IRR depends entirely on the initial

outlay and cash proceeds of project which is being evaluated for

acceptance or rejection.

It is therefore appropriately referred to as internal rate of return. The IRR

is usually, the rate of return that a project earns. It is defined as the

discount rate which equates the aggregate present value of net cash

inflows (CFAT) with the aggregate present value of cash outflows of a

project. In other words it is that rate which gives the net present value

zero.

IRR is the rate at which the total of discounted cash inflows equals the

total of discounted cash outflows (the initial cost of investment). It is used

where the cost of investment and its annual cash inflows are known but

the rate of return or discounted rate is not known and is required to be

calculated.

20. What are the limitations of internal rate of return?

The IRR suffers from serious limitations:

1. It involves tedious calculations. It involves complicated computation problems.

2. It produces multiple rates which can be confusing. This situation arises in the case of

non-conventional projects.

3. In evaluating mutually exclusive proposals, the project with highest IRR would be

picked up in exclusion of all others. However in practice it may not turn out to be the

most profitable and consistent with the objective of the firm i.e., maximization of

shareholders wealth.

4. Under IRR, it is assumed that all intermediate cash flows are reinvested at the IRR. It

is rather ridiculous to think that the same firm has the ability to reinvest the cash flows at

different rates. The reinvestment rate assumption under the IRR is therefore very

unrealistic. Moreover it is not safe to assume always that intermediate cash flows from

the project may be reinvested at all. A portion of cash inflows may be paid out as

dividends, a portion may be tied up with current assets such as stock, cash, etc. Clearly,

the firm will get a wrong picture of the project if it assumes that it invests the entire

intermediate cash proceeds.

21. What are the merits of net present value method?

The merits of the net present value method is as follows

1.The most significant advantage is that it explicitly recognizes the time value of money,

e.g., total cash flows pertaining to two machines are equal but the net present value are

different because of differences of pattern of cash streams. The need for recognizing the

total value of money is thus satisfied.

2. It also fulfills the second attribute of a sound method of appraisal. In that it considers

the total benefits arising out of proposal over its life time.

3. It is particularly useful for selection of mutually exclusive projects.

4. This method of asset selection is instrumental for achieving the objective of financial

management, which is the maximization of the shareholder's wealth. In brief the present

value method is a theoretically correct technique in the selection of investment proposals.

22. What are the Demerits of net present value method?

The demerits of the net present value method are as follows:

1. It is difficult to calculate as well as to understand and use, in comparison with payback

method or average return method.

2. The second and more serious problem associated with present value method is that it

involves calculations of the required rate of return to discount the cash flows. The

discount rate is the most important element used in the calculation of the present value

because different discount rates will give different present values. The relative

desirability of a proposal will change with the change of discount rate. The importance of

the discount rate is thus obvious. But the calculation of required rate of return pursuits

serious problem. The cost of capital is generally the basis of the firm's discount rate. The

calculation of cost of capital is very complicated. In fact there is a difference of opinion

even regarding the exact method of calculating it.

3. Another shortcoming is that it is an absolute measure. This method will accept the

project which has higher present value. But it is likely that this project may also involve a

larger initial outlay. Thus, in case of projects involving different outlays, the present

value may not give dependable results. ^

4. The present value method may also give satisfactory results in case of two projects

having different effective lives. The project with a shorter economic life is preferable,

other things being equal. It may be that, a project which has a higher present value may

also have a larger economic life, so that the funds will remain invested for longer period

while the alternative proposal may have shorter life but smaller present value. In such

situations the present value method may not reflect the true worth of alternative

proposals. This method is suitable for evaluating projects whose capital outlays or costs

differ significantly.