PAPL/ME27/PCC 1

CF Total No. of Questions: 8 Max Marks: 100 No.of Pages : 5 Time Allowed: 3 Hours

Answers All Questions

1. Answer any five of the following

i. JK Ltd manufactures and sells two products J and K. The annual sales are expected in the ratio of J : 1 and K :3. The total annual sales planned to be Rs.4,20,000. P/V ratio of J is 40 % and that of K is 50 %. Annual fixed costs is estimated at Rs.1,20,000. Calculate the budgeted break-even sales value

ii. What are the assumptions made in calculating Economic Order quantity

iii. Bonus paid under the Halsey plan with 50% for the time saved equals the bonus paid

under the Rowan system. When will this statement hold good?

iv. Calculate the annual ordering cost from the following data Annual Usage = 20,000 units Cost per unit = Rs.100 Cost of carrying inventory – 10% of cost. Economic order quantity = 200 units

v. Explain single and multiple overheads

vi. Enumerate the usefulness of Cost audit to the Government.

(5x2=10 Marks)

2. BYE Ltd manufactures three garden furniture products- chairs, benches and tables. The budgeted unit cost and resource requirement of each of these items is given below:-

Chair Bench Table Rs. Rs. Rs. Timber cost 5.00 15.00 10.00 Direct labour cost 4.00 10.00 8.00 Variable overhead cost 3.00 7.50 6.00 Fixed overhead cost 4.50 11.25 9.00 16.50 43.25 33.00 Budgeted volumes per annum 4,000 2,000 1,500 - These volumes are believed to equal the market demand for these products. - The fixed overhead costs are attributed to the three products on the basis of direct

labour hours - The labour rate is Rs.4.00 per hour - The cost of the timber is Rs.2.00 per square metre.

The products are made from a special timber. A memo from purchasing manager advises you that because of a problem with the supplier, it is to be assumed that this special timber is limited in supply to 20,000 square metres per annum.

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The sales director has already accepted an order for 500 chairs, 100 benches and 150 tables which if not supplied would incur a financial penalty of Rs.2,000. These quantities are included in the market demand estimates above. The selling prices of the three products are: Chair – Rs.20.00

Bench – Rs.50.00 Table - Rs.40.00

Determine (a) the optimum plan and state the net profit that this should yield per annum (b) Calculate and explain the maximum prices which should be paid per square meter in order

to obtain extra supplies of the timber. (15 Marks) 3. a. The Indian Cement Co.produces an additive for cement. The summary statement for the

month of Aug’2008 is given below Opening Inventory Material Tonnes Rate Amount Rs. Rs. Clay 2,000 20 40,000 Lime 1,000 15 15,000 Gypsum 500 25 12,500 Finished quantity 2,000 24 48,000 Receipts in the month Material Tonnes Rate Amount Freight Rs. Rs. Rs. Clay 8,000 22.50 1,80,000 5,000 Lime 4,000 17.50 70,000 2,500 Gypsum 600 24.00 14,400 700

Transactions for the month Rs. a. Wages accrued 40,000 b. Factory expenses Depreciation 7,500 Insurance 2,500 Rates & Taxes 4,000 Gas bill received 10,000 c. Production for the month was 10,800 tonnes of which 9,000 tonnes were sold at Rs.50 per tonne.

Closing Inventory Material Tonnes Clay 3,000 Lime 2,000 Gypsum 300

Materials are priced at the monthly weighted average price

Prepare a cost sheet, arriving at the cost of production of cement additive in August (10 Marks)

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3b. The material cost for 100 kgs of chemical X is made of Chemical A - 30 kgs @ Rs.4.00 per kg Chemical B - 40 kgs @ Rs.5.00 per kg Chemical C - 80 kgs @ Rs.6.00 per kg In a batch of 500 kgs of chemical X were produced from a mix of Chemical A - 140 kgs at cost of Rs.588 Chemical B - 220 kgs at a cost of Rs.1,056 Chemical C - 440 kgs at a cost of Rs.2,860 Calculate i) material cost variance ii) material price variance and iii) material mix variance ( 6 Marks) 4. The following details are given in respect of a manufacturing unit for the month of Aug’2008

i) Opening work in progress - 5000 units a) Materials - 100 % Complete Rs.18,750 b) Labour - 60 % Complete 7,500 c) Overheads - 60 % Complete 3,750

ii) Units introduced in the process 17500 units iii) Units transferred to next process 17500 units iv) Process cost for the period are:

a) Materials - Rs.2,50,000 b) Labour - 1,95,000 c) Overheads - 97,500

The stage of completion of units in closing WIP is estimated to be a) Materials - 100 % Complete b) Labour - 50 % Complete c) Overheads - 50 % Complete

Prepare a statement of equivalent units of production, statement of cost. Also find the value of i) Output transferred ii) Closing work in progress, using average cost method

(9 Marks) 5. Answer any five of the following

i. Write a short note on indifference point

ii. Write a shot note on uses of Return on Investment

iii. The following data is available in respect of material A for the year ended 31st March 2008.

Rs. Opening stock 90,000 Purchases during the year 2,70,000 Closing stock 1,10,000

Calculate the number of days for which the average inventory is held

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iv. Firms X and Y are identical in every respect, except that X is undervalued while Y is

levered. Company Y has Rs.20 lakhs of 8% debentures outstanding Assuming that all the MM assumptions are met , tax rate is 50% , EBIT is Rs.6,00,000 and equity capitalization rate for company Y is 10% what would be the value of each firm according to MM approach

v. What are the weakness in Weighted Average Cost of capital?

vi. A Company’s share is quoted in the market at Rs.20 currently. The company pays a

dividend of Rs.1 per share and the investor expects a growth rate of 5% per year, what is the cost of company’s equity capital

(5x2 =10 Marks) 6. The following is the condensed Balance Sheet of XYZ Ltd at the beginning and at the end of

the year 2007. As at 01.01.2007 As at 31.12.2007 Assets Rs. Rs. Cash and Bank Balances 50,000 40,000 Sundry Debtors 77,000 73,000 Short term Investments 1,10,000 84,000 Prepaid Expenses 1,000 2,000 Stock in Trade 92,000 1,06,000 Freehold land and sheds 1,00,000 1,00,000 Plant & Machinery 72,000 80,000 5,02,000 4,85,000 Liabilities & Capital Sundry Creditors 1,03,000 96,000 Outstanding expenses 13,000 22,000 5% Debentures 90,000 70,000 Depreciation Fund 40,000 44,000 Reserve for contingencies 60,000 50,000 Profit & loss account 16,000 23,000 Share capital 1,80,000 1,80,000 5,02,000 4,85,000 The following additional information are available

a. Dividend @ 10% was paid b. New machinery of Rs.20,000 was purchased during the year and old machinery costing

Rs.12,000 was sold for Rs.4,000 on which accumulated depreciation was Rs.6,000. The factory sheds are fully depreciated

c. 5% Debentures of face value of Rs.100 each worth Rs.20,000 were redeemed by purchase from the open market at Rs.96 each

d. Rs.10,000 was debited to the Contingency reserve for settlement of previous year tax liability

e. Investments worth Rs.20,000 were sold at book value Prepare a schedule of changes in working capital and a statement showing sources and application of funds. (15 Marks)

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7. a. Sun Industries is marketing all its products through a network of dealers. All sales are on

credit and the dealers are given one month time to settle bills. The company is thinking of changing the credit period with a view to increase its overall profits. The marketing department has prepared the following estimates for different credit periods. Current policy Plan I Plan II Plan III Credit period (in months) 1 1.50 2.00 3.00 Sales (in lakhs of rupees) 120 130 150 180 Fixed cost (in lakhs of rupees) 30 30 35 40 Bad Debts (% of sales) 0.5 0.8 1 2 The company has a contribution/sales ratio of 40%. Further it requires a pretax return on investment at 20%.

Evaluate the above proposals and recommend the best credit period for the company (10 Marks) 7 b.Media Video Ltd is considering building an assembly plant and the company has two

options, out of which it wishes to chose the best plant. The projected output is 10,000 pieces per month. The following data are available.

Plant A Plant B Initial Cost Rs.30,00,000 Rs.22,00,000 Direct labour cost (per year) – 1st shift 15,00,000 7,50,000 2nd shift 9,50,000

Overhead (per year) 2,50,000 2,10,000

Both the plants have an expected life of 10 years after which there will be no salvage value. The cost of capital is 10%. The present value of an ordinary annuity of Rs.1 for 10 years @10% is 6.1446. Ignoring effect of taxation what would be the desirable choice.

(6 Marks) 8. CCI Company is contemplating conversion of 8% convertible debentures of Rs.1,000 each.

At present it has 500 such debentures outstanding. The market price of the debenture is Rs.1,080. The terms of conversion provides that one debenture will be converted for 10 shares. The price earning ratio before redemption is 20:1 and anticipated price earning ratio after redemption is 30:1. The number of shares outstanding prior to conversion was 10,000. Earning before interest and taxes amounted to Rs.2,00,000 and the company is in 40% tax bracket. Should the company convert its debentures into shares? (9 Marks)

PAPL/ME27/PCC 6

PRIME ACADEMY 27 –Session PCC

COST ACCOUNTING AND FINANCIAL MANAGEMENT Suggested Answers

PART 1 1. Rs. i. Sales of J : 4,20,000× (1/4) = 1,05,000

Contribution of J = 1,05,000 × 0.4 = 42,000 Sales of K : 4,20,000 × (3/4) = 3,15,000

Contribution of K = 3,15,000 × 0.50 = 1,57,500 Total contribution = Rs.42,000 + Rs.1,57,500 = Rs.1,99,500 Combined P/V ratio = 1,99,500/4,20,000 = 47.5 % Break-even sales value = Fixed cost / (p/v ratio) = 1,20,000/0.475 = Rs.2,52,631 ii

- It is assumed that carrying costs are based on the average inventory which decreases at a constant rate from the order quantity to zero.

- The annual anticipated usage is known and is assumed to be constant - The ordering cost per order remains constant and it varies directly with increase in orders. - The cost per unit to be purchased is known in advance and is assumed to be constant

throughout the year. - The replenishment is made instantaneously

iii.

Bonus under Halsey plan Bonus under Rowan plan Std Wage rate x (50/100) x Time saved Std wage rate x (Time saved/Time

allowed) x Time Taken

½ = Time taken/Time allowed or Time taken = ½ x Time allowed Thus when time taken is equal to 50% of time allowed, the bonus under Halse and Rowan Plan is equal

iv. : EOQ = √2ab/CS 200 = √2 x 20000xb/(100x0.1) 200 = √4000b

Buying cost per order b=10 Number of oders per year = 20,000/200 = 100 Annual ordering cost = 100 x 10 = Rs.1,000

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v. A single overhead rate computed for the entire factory is called Blanket or single overhead rates. Single overhead rates may be applied in small firms and only where one single product is manufactured particularly in a chain of continuous process.

The other method which is more commonly used is to determine Multiple rates for each production department, for each service department, for each cost centre, for each product, for fixed and variable overheads. The number of overhead rates which a firm may compute would be fixed after taking into consideration the two opposing factors i.e clerical costs and the degree of accuracy desired.

vi. Usefulness to Government:-

1) Cases for tariff protection can be forcefully put forth if backed by cost audited data from which excesses, abnormal and avoidable expenses have been weeded out.

2) Where Government enters into cost-plus contracts , cost audit helps to fix the price for the contract

3) Cost audit brings out inefficient units thereby enables the government to take remedial action.

4) Since cost audit ensures efficient running of enterprises, it promotes competition and facilitates automatic check on inflation

5) Cost audit data helps Government in price fixation on a rational basis. 6) It enables the Government to settle the disputes brought before it.

2. The availability of timber is limited to 20,000 square metres. The actual requirement of timber

based on the budgeted volume is calculated as below. Timber requirement Timber required Budgeted Total volume per item (sq.m) Volume(Nos) (square mtr.) Chair 2.50 4,000 10,000 Bench 7.50 2,000 15,000 Table 5.00 1,500 7,500

Timber requirement 32,500 Actual availability 20,000

Shortfall 12,500 Chair Bench Table Rs. Rs. Rs. Selling price/unit 20.00 50.00 40.00 Less: variable costs Timber cost 5.00 15.00 10.00 Direct labour cost 4.00 10.00 8.00 Variable overhead cost 3.00 7.50 6.00 Total variable cost 12.00 32.50 24.00 Contribution/unit 8.00 17.50 16.00 Timber requirement/unit (sq.mtr) 2.50 7.50 5.00 Contribution per sq.mtr 3.20 2.33 3.20

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Ranking I III II

Optimum production plan based on ranking Item Nos Requirement/unit Total requirement Balance

(sq.mtr) (sq.mtr) (sq.mtr) Chair 4,000 2.50 10,000 10,000 Table 1,500 5.00 7,500 2,500 Benches 333 7.50 2497.5 2.50 Net profit based on above production plan Item Nos contribution/unit Total contribution (Rs.) (Rs.) Chair 4,000 8.00 32,000.00 Table 1,500 16.00 24,000.00 Benches 333 17.50 5,827.50 Total 61,827.50 Less Fixed cost (4,000×4.5+2000×11.25+1,500×9) 54,000.00 Profit 7,827.50 Chair Benches Tables Rs. Rs. Rs. Contribution/unit 8.00 17.50 16.00 Add back timber cost 5.00 15.00 10.00 Total 13.00 32.50 26.00 Timber required (sq.mtr) 2.50 7.50 5.00 Maximum economic price per sq.mtr 5.20 4.33 5.20

Demand for chairs and tables is fully met and herefore, o additional timber required for hese. Additional timber would be required for producing additional 1,667 benches and timber required for these is = 1667 × 7.50 = 12,502.50 sq.mtr however 2.50 sq.mtr timber is still available. Therefore net additional timber required is 12,500 sq.mtrs at a maximum price of Rs.4.33 per sq.mtr.

3a. Material Consumed

Opening Receipts Total Weighted Avg rate Material Tonnes Amount Tonnes Amount Tonnes Amount Rs./ton Rs. Rs. Clay 2,000 40,000 8,000 1,85,000 10,000 2,25,000 22.50 Lime 1,000 15,000 4,000 72,500 5,000 87,500 17.50 Gypsum 500 12,500 600 15,100 1,100 27,600 25.09 Value of closing Inventory Value of material consumed Clay 3,000 67,500 1,57,500 Lime 2,000 35,000 52,500 Gypsum 300 7,527 20,073 Total 2,30,073

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Cost Sheet Raw materials consumed 2,30,073 Labour 40,000 Overheads Depreciation 7,500 Insurance 2,500 Rates & Taxes 4,000 Gas bill received 10,000 24,000 Cost of production 10,800 2,94,073 Opening stock 20,000 48,000 30,800 3,42,073 Rs. Per ton 11.11 Cost of sales 9,000 99,956 Sales 9,000 4,50,000 Profit 3,50,044

3b.

Standard material cost for 100 kgs of chemical X = Rs.(30x4 + 40x5 + 80x6) = Rs.(120+200+480) = Rs.800 Actual material cost for 100 kgs of chemical X = Rs.(588+1,056+2,860) = 4,504/5 5 = Rs.900.80 Material Cost Variance = Rs.900.8 – Rs.800 = Rs.100.8 (Adverse) Actual price Chemical A - 140 kgs at cost of Rs.588 = Rs.4.20 per kg Chemical B - 220 kgs at a cost of Rs.1,056 = Rs.4.80 per kg Chemical C - 440 kgs at a cost of Rs.2,860 = Rs.6.50 per kg Material price variance = Actual quantity ( Actual price – standard price) = 140/5 (4.2- 4.0) + 220/5 (4.8-5.0) + 440/5 (6.5-6.0) = 5.6 (A) + 8.8 (F) + 44.0 (A) = Rs.40.8 (A) Material mix variance = Standard price (Actual proportion – standard proportion) Actual proportion = 140 /5 : 220/5 : 440/5 = 28 : 44 : 88 Standard mix weight = 30 + 40+ 80 = 150 kgs Actual mix weight = 28+ 44+ 88 = 160 kgs Standard proportion of mix = 160 ( 30 : 40 : 80) 150 = 32 : 42-2/3 : 85-1/3 Material mix variance = Rs.4( 28 -32) + 5( 44 – 42 2/3) + 6 (88 – 85 1/3) = Rs.6.67 (A)

PAPL/ME27/PCC 10

4.

Statement of Equivalent Production (Average Method) Input Output Equivalent production Units Details Units Details Material Labour & Overhead 5,000 Stock Trf. to 17,500 Units % Completion Units % Completion next proc 17,500 100 17,500 100 17,500 inroduced stock 5,000 5,000 100 2,500 50 22,500 22,500 22,500 20,000 Statement of Cost for each element Elements of Cost of opening Cost in process Total Cost Eq.Units Cost/unit Cost WIP Rs. Rs. Rs. Rs. Material 18750 2,50,000 268750 22500 11.944 Labour 7500 1,95,000 202500 20000 10.125 Overhead 3750 97,500 101250 20000 5.063 30000 5,42,500 572500 Statement of Apportionment of Cost Items Elements Eq.units Cost per unit Cost Total Cost Units transferred Material 17,500 11.944 2,09,020 to next process Labour 17,500 10.125 1,77,188 Overhead 17,500 5.063 88,602 4,74,810 Closing Stock Material 5,000 11.944 59,720 Labour 2,500 10.125 25,313 Overhead 2,500 5.063 12,657 97,690 5,72,500

5. i. The capital structure of a firm should consist of an optimum mix between equity and debt. In attempting an optimum mix, one should compare cost of capital with expected return from the investment. So long as cost of financing by debt is less than the rate of return from the investment, add the difference to the earnings per share. In such a case debt financing is more profitable. The indifference point in planning the capital structure is that point at which the after tax cost of acquisition of outside funds is equal to the rate of return from the investment. In other words, at this point rate of return on capital employed is equal to the rate of interest on debt. This is also known as break even level of EBIT for alternative financial plan.

PAPL/ME27/PCC 11

ii.

The most common uses of Return on Investment concept are (1) Measures operating performance

(2) Evaluates and controls capital expenditure projects

(3) Helps in profit planning

(4) Analyses profit by operating divisions

(5) Analyses profit by product line

(6) Pricing of new products

(7) Analysis major cost areas in a cost reduction programme

(8) Helps in determining the relative profitability of different projects

(9) Helps in process development

iii.

Average inventory = Rs.(90,000+1,10,000)/2 = Rs.1,00,000 Cost of rawmaterial consumed Opening stock 90,000 Add: Purchases 2,70,000 3,60,000 Less: Closing stock 1,10,000 2,50,000 Inventory turnover ratio = Cost of raw material consumed = 2,50,000 Average stock of raw material 1,00,000 = 2.50 Average number of days for which the average inventory is held = 365 days/2.5 = 146 days

iv. Value of unlevered firm = EBIT (1-t) = Rs.6,00,000 ( 1 – 0.5) = Rs.30,00,000 Ke 0.1 Value of levered firm = Value of unlevered + Debt = Rs.30,00,000 +(Rs.20,00,000 x0.5) = Rs.40,00,000 v. If a firm relies heavily on zero cost or low cost short term debt, the inclusion of the short term debt in the cost of capital calculations will result in a lower overall cost of capital. If the firm accepts low return projects on the basis of low weighted average cost of capital, it will be compounding its problems and continuing its exposure to high financing risks In the event of continued low profitability, the weighted average calculation of cost of capital will be inaccurate. If the firm gets low profit goals due to very low cost of capital , the shareholders will seek higher returns elsewhere. vi. : Cost of equity = D/P + g = Rs. 1/20 +0.05 = 0.10 or 10%

PAPL/ME27/PCC 12

6. Schedule of changes in Working Capital Particulars As on 1.1.07 As on 31.12.07 Increase Decrease Rs. Rs. Rs. Rs. Current Assets Cash and Bank Balances 50,000 40,000 10,000 Sundry Debtors 77,000 73,000 4,000 Short term Investments 1,10,000 84,000 26,000 Prepaid Expenses 1,000 2,000 1,000 Stock in Trade 92,000 1,06,000 14,000 _________ 3,30,000 3,05,000 Current liabilities Sundry Creditors 1,03,000 96,000 7,000 Outstanding expenses 13,000 22,000 9,000 1,16,000 1,18,000 22,000 49,000 Working capital 2,14,000 1,87,000 Decreasing in Working capital 27,000 27,000 ________ 2,14,000 2,14,000 49,000 49,0000

Statement of Sources and Applications of Funds Sources Rs. Funds from operations 36,200 Decrease in working capital 27,000 Sale of machinery 4,000 67,200 Application Purchase of Machinery 20,000 Repayment of debenture 19,200 Dividend paid 18,000 Tax paid 10,000 67,200

Working Notes 1. Funds from operations Rs. Rs. Profit as per P & L A/c as on 31.12.07 Rs.23,000 Add: Adjustment carried out not involving cash flow Depreciation 10,000 Loss on sale of machinery 2,000 Dividend paid 18,000 30,000 53,000 Less: Profit on redemption of debentures 800 52,800 Opening balance of P & L A/c 1.01.07 16,000 Funds from operations 36,200

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2. Machinery Account Rs. Rs. To Balance b/d 72,000 By accumulated depreciation 6,000 To cash A/c 20,000 By Cash A/c 4,000 By Profit & Loss A/c 2,000 By balance c/d 80,000 92,000 92,000 3. Depreciation Account To machinery A/c 6,000 By Balance b/d 40,000 To Balance c/d 44,000 By P & L A/c 10.000 (balancing figure) _______________________________ ___________________________ 50,000 50,000 4. 5% Debentures account To Bank A/c 19,200 By Balance b/d 90,000 To P & L A/c 800 To Balance c/d 70,000____________________________ ______ 90,000 90,000

7a. Rs. Rs. Rs. Rs. Current policy Plan I Plan II Plan III Credit period (in months) 1 1.50 2.00 3.00 Sales 120 130 150 180 Contribution (40%) 48 52 60 72 Less: Fixed cost 30 30 35 40 Profit 18 22 25 32 1.Excess over current profit - 4 7 14 Variable cost (60% of sales) 72 78 90 108 Fixed cost 30 30 35 40 Cost of sales 102 108 125 148 Cost of debtors 8.50 13.50 20.83 37.00 Excess over current cost - 5.50 12.33 28.50 2.Cost of funds to meet 20% pretax return 1.00 2.47 5.70 Bad Debts 0.60 1.04 1.50 3.60 3.Increse in bad debts over the current period - 0.44 0.90 3.00 4.Net benefit over the current period (1-(2+3)) 2.56 3.63 5.30 Based on the above credit period plan III is recommended for the company

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7b. Saving /(additional cost) of using plant A (per annum) Direct labour 1st shift (Rs.7,50,000) 2nd shift saving 9,50,000 Over head (40,000) Saving per year 1,60,000 Present value of recurring annual savings of Rs.1,60,000 per year at 10% p.a

= Rs.1,60,000 x 6.1446 = Rs.9,83,136

Additional outlay for plant A = Rs.30,00,000 – Rs.22,00,000 = Rs.8,00,000 The present value of savings for using Plant A is higher than the extra capital outlay. Therefore it is advisable to go for plant A

8. Pre conversion Rs. Post conversionRs.

EBIT 2,00,000 2,00,000 Interest 40,000 _________________ 1,60,000 2,00,000 Tax @ 40% 64,000 1,00,000 Income after tax 96,000 1,00,000 No. of equity shares 10,000 15,000 Earning per share 9.6 6.67 Market price based on PE ratio 192 200 The company should advise the debenture holders to go for conversion, because for a debenture of Rs.1,000 ,each debenture holder will get shares worth Rs.1920 i.e 192 x 10. The conversion of debentures into shares is in the interest of the company as well, because the market value of its shares will go up from Rs.192 per share to Rs.200 per share.

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IVS

Total No. of Questions: 8 Max Marks: 100 No.of Pages : 4 Time Allowed: 3 Hours

1. Answer any five of the following sub-divisions with regard to the provisions of the Income-tax Act, 1961 for the assessment year 2008-09:

(a) M/s Pals Enterprises engaged in manufacturing of automobile parts. They had invested a sum of Rs.15 lakhs in plant &machinery on 03.10.08. What is the depreciation amount that can be claimed?

(b) Mr.A is a business man earning 50 lakhs p.a.. He wanted your advise to pay advance tax. Advise

him the due dates for payment of advance taxes?

(c) Mr.Y wanted to start his business in north eastern states. He wanted to claim deduction under section 80-IE. Suggest him what are the business eligible under this section?

(d) What are the eligible contributions to claim deductions u/s 35 CCA?

(e) (e). Mr. Raman has recovered a sum of Rs. 50,000/- from government of Andhra Pradesh.

Discuss the taxability of such receipt in the hands of Mr.Raman.

(f) Whether any sum received by an employer from his employees towards contributions to provident fund, superannuation fund etc. are not taxable. Explain?

(5 x 2 =10 Marks)

2. from the following particulars furnished by Mr.A for the year ended 31.03.2008, you are requested to compute the total income and the tax payable for the assessment year 2008 – 09.

1. Mr. A retires on 31.12.2007 at the age of 60, after putting in 25 years and 9 months of service from a private company at Mumbai.

2. He was a paid a salary of Rs. 25,000/- p.m and House Rent Allowance of Rs. 6,000/- p.m. He

paid a rent of Rs. 6,500/- p.m. during his tenure of service. 3. On retirement, he was paid a Gratuity of Rs. 3,50,000/-. He was not covered by the payment of

Gratuity Act. His average salary in this regard may be taken as Rs. 24,500/- . Mr.A had not received any other gratuity at any point of time earlier, other than his gratuity.

4. He had accumulated leave of 15 days p.a during the period of service, this was encashed by

Mr.A at the time of his retirement. A sum of Rs. 3,15,000/- was received by him in this regard. His average salary may be taken as Rs. 24,500/-.

5. After retirement, he ventured into textile business and incurred a loss of Rs. 80,000 for the period

upto 31.03.2008.

6. Mr.A has invested Rs. 22,500/- in recognized provident fund, Rs, 40,000/- in public provident fund, Rs. 5,000 in debt oriented mutual funds and Rs. 37,500/- in National saving certificate.

(20 Marks)

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3

(a) M/S. XYZ & Co., pays a rent of Rs.40,000/- per month (exclusive of service tax) for property located at Mumbai to M/S.MSR&Co.(HUF). M/S.XYZ&Co. got converted into Company with effect from Jan’08. What is the amount of tax to be deducted for such payment both before & after conversion? What are the consequences if TDS is not deducted?

(b) What are the conditions to be fulfilled by predecessor & successor co-operate banks to provide for set off and carry forward of losses.

(9+6 = 15 Marks)

EITHER 4

a) Mr.Y completed construction of a residential house on 01.04.2003. interest paid on loans borrowed for

purpose of construction during the 2 year prior to completion was Rs. 20,000/-. The house was let out on a monthly rent of Rs. 20,000/-. The house was let out monthly on a monthly rent of Rs. 4,000/- Annual Corporation tax paid is Rs. 6,000/-. Interest paid during the year is Rs. 15,000/-. Amount spent on repairs is Rs.2,000/- Fire insurance Premium paid is Rs. 1,500. Annual letting value as per corporation records is Rs. 30,000/-. Property was vacant for 3 months. Compute income chargeable under the head “Income from house property” for the A.Y. 2008 – 09.

b) Mrs. Sowbagya has sold 500 shares, which she invested on M/s. Iron& Steel Co. for Rs.850/- per

share. ⇒ Details of acquisition: 1994-95 -350 shares -150/- per share 1999-00 -250 shares -250/- per share

a) What is capital gain & tax liability? b) Suggest tax planning for the above capital gain if arises?

(8+6 = 14 Marks)

OR

4 (a). MSN & Co., carrying business on civil constructions has approached you on 01.09.08 to file their returns of incase for the AY 08-09 v/s 139(1)

Particulars Amount Rs.(lacs)

Particulars Amount Rs.(lacs)

To salaries 13.50 By receipts 45.00To rent 5.05 By sale of car(part of block) 1.00

To general expenses 3.58 By interest on FD’s 0.50To taxes 1.29 To advertisement 5.00 To donations 2.75 To depreciation 5.75 To profit 10.58

Total 47.50 Total 47.50 Other information provided are as follows:

• Cost of accounting of car in P.Y 2003-04 is 7, 00,000. • General expenses includes cash payment of Rs.20, 000/-.

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• Taxes include wealth tax of Rs.70, 000. • Advertisement expenses include expenses incurred on advertisement in brochure published by

political party • Donations include

⇒ Donation eligible u/s.80g is Rs.75,000 ⇒ Contribution to national laboratory is Rs.70, 000.

• Rent paid includes Rs.150/- paid to land lord on which tax not deducted (b) Explain the concept of residential status incase of an individual?

(8+6 = 14 Marks)

5 Answer any four of the following five sub-divisions with regard to the provisions of the Incometax Act, 1961:

1. Mr.Santhosh receives Rs.15,000 per month towards lease rental on letting of furniture throughout the year 2007-08. Depreciation works out to Rs.25,000/-.What is the income chargeable under the head Other Sources.

2. Mr.Kiran who is a physically handicapped minor (suffering from a disability of the nature specified

in section 80U) earns bank interest of Rs.75,000 and Rs. 30,000 from marking bags manually by himself. What is the total income chargeable in the hands of Mr.Kiran?

3. Mr.Charan, an individual earning gross income of Rs. 30,000 p.a filed his return of income for

A.Y. 2008 – 09 on 30.10.2008. Later on he discovers a mistake in the return and wanted to revise his return. Can Mr.Charan revise his return?

4. Ms. Madhumati earned an income of Rs. 3,75,350 for the A.Y. 2008 – 09. She had paid an

amount of Rs. 30,000/- has advance tax on 14.12.2007. Whether she is liable to pay interest under section 234C?

5. Explain the deduction u/s. 80GG?

(4 x 4 = 16 Marks)

6 Answer any five out of the following:

(1) Service provided by the service provider to service receiver is exempt in few cases. Explain? (2) Whether e-filing of service tax is mandatory or voluntary? (3) Explain the term Pure agent under service tax? (4) What are the due dates for filing half yearly returns under service tax. (5) Explain Gross Product Variant? (6) Explain the salient features of Invoice method?

(5 x 2 = 10 Marks)

PAPL/ME27/PCC 18

7

(a) Mr.A has agreed to render services to Mr. Y. The following are the events taken place:

Particulars Amount

Service contract was entered on 31.08.2007

Advance received in October 07 60,000

Total value of service billed in January 08 2,10,000

Service rendered include non taxable service of Rs. 70,000

Balance amount receivable received in the month of March 2008 When does the liability of service tax arise and for what amount? (b) What are the demerits of VAT?

(4+2=6Marks) 8

Answer any three of the following (a) Explain the concept of Small Service provider? (b) What are the copies to be attached with service tax return? (c) Explain the merits of VAT? (d) what are the different variants of VAT and how is deduction available for tax paid on inputs including capital inputs?

(3 x 3 = 9 Marks)

PAPL/ME27/PCC 19

PRIME ACADEMY 27 –Session PCC

INCOME TAX , VAT AND SERVICE TAX SUGGESTED ANSWERS

1 (a) M/s Pals Enterprises engaged in manufacturing of automobile parts will be eligible for

enhanced depreciation @ 20% in addition to the normal depreciation which is @ 15%. As there is no data available when the asset was put to use, the purchase date itself shall be considered as date of put to use i.e., 03.10.08. This means asset was put to use for more than 180 days. Therefore, depreciation amount to be claimed will be 50% of the above depreciation.

Particulars Amount (Rs.) Amount invested in Plant 15,00,000/- Normal Depreciation (@ 15%) 2,25,000/- Enhanced Depreciation (@ 20%) 3,00,000/-

Total Depreciation 5,25,000/- (b) Due dates of advance tax payments are: 15th September 15th December 15th March (c) In order to avail deduction u/s. 80IE, Mr.A has to start either of the following business:

i. hotel (not below two star category); ii. adventure and leisure sports including ropeways; iii. providing medical and health services in the nature of nursing home with a minimum

capacity of 25 beds; iv. running an old-age home; v. operating vocational training institute for hotel management, catering and food craft,

entrepreneurship development, nursing and para-medical, civil aviation related training, fashion designing and industrial training;

vi. running information technology related training centre; vii. manufacturing of information technology hardware; and viii. bio-technology.

(d) The following are the eligible contributions to claim deductions u/s 35 CCA:

Contributions made to approved associations/ institutions for implementation of rural development programmes, the training of persons for implementing such programmes and contributions to National Fund for rural development will be allowed as deduction. Similarly, contributions to the National Urban Poverty Eradication Fund notified by the Central Government also qualifies for

PAPL/ME27/PCC 20

deduction. The assessee shall furnish a certificate from such institution for claiming deduction under this section.

(e) Mr. Raman has recovered a sum of Rs. 50,000/- from government of Andhra Pradesh. Sec. 10(17A) Any payment made in cash or in kind –

a). as any award instituted in the public interest by Central or any State Government or any other body and approved by the Central Government;

b) as a reward by the Central Government or any State Government for such

purposes as may be approved by the Central Government in the public interest.

So, the amount received from the Govt. of Andhra Pradesh will be exempt and hence not taxable in the hands of Mr.Raman.

(f) As per section 2(24) of the Income Tax Act, 1961 the term ‘income’ includes any sum

received by the assessee from his employees as contributions to any provident fund (PF) or superannuation fund or Employees State Insurance Fund (ESI) or any other fund for the welfare of such employees. Therefore, the sum received is taxable.

2. Computation of Total Income of Mr.A for the A.Y.2008 – 09

Particulars W N Ref Amount in Rs.

Salary 25000 * 9 2,25,000

HRA 1 18,000

Gratuity 2 43,750

Leave Encashment 3 70,000

Gross Salary 3,56,750

Gross Total Income 3,56,750

Less: Deduction u/s. 80C 4 1,00,000

Total Income 2,56,750

Tax on Total Income 26,025

Surcharge @ 10% Nil

26,025

Education Cess @ 2% 521

Secondary and higher education cess @ 1%

260

Total Tax Payable (rounded-off) 26,810 Working Note 1 – HRA

Particulars Amount Amount in Rs. Amount received 6000 * 9 54,000Less: Amount exempt u/s. 10(13A) Least of the following: i. Amount received 54,000

PAPL/ME27/PCC 21

ii. Rent paid – 10% of salary (6500*9) - (10% of 225000) 36,000iii. 50% of salary (since Mumbai) 50% of 225000 1,12,500 36,000

Taxable HRA 18,000 Working Note 2 – Gratuity

Particulars Amount Amount in Rs. Amount received 3,50,000Less: Amount exempt u/s. 10(10) Least of the following: i. Amount received 3,50,000ii. Notified Amount 3,50,000iii.1/2 * Avg. salary of 10 months * No. of completed years of service (1/2 * 24500 * 25)

3,06,250 3,06,250

Taxable Gratuity 43,750 Working Note 3 – Leave Encashment

Particulars Amount Amount in Rs. Amount received 3,15,000Less: Amount exempt u/s. 10(10AA) Least of the following: i. Amount received 3,15,000ii. Notified Amount 3,00,000iii.Avg. salary of last 10 months * 10 months (24500 * 10)

2,45,000

iv. Leave encashment calculation on bass of 30 days credit for every completed years of service (15 / 30 * 25 * 24500)

3,06,250 2,45,000

Taxable Gratuity 70,000 Working Note 4 – Deduction u/s. 80C

Particulars Amount Contribution to Recognised Provident Fund 22,500Contribution to Public Provident Fund 40,000Investment in Debt oriented funds NilInvestment in NSC 37,500

Total Deduction 1,00,000 Note: As per section 71, loss from business cannot be used to set-off against salary income. This loss is carried forward for a period of 8 years.

3a (a) Any person responsible for making payment towards rent shall be liable to deduct tax at

source under section 194I. However, where the aggregate of the amounts paid or credited to the account of the recipient does not exceed Rs.1,20,000 during the financial year tax deduction at source is not warranted.

PAPL/ME27/PCC 22

In case, where the payer is an individual or HUF, the applicability of this section arise only if their sales, gross receipts or turnover exceed the limits prescribed u/s.44AB in the immediately preceding year.

Rate of TDS

Nature of the Assessee Rate of TDS

Where the recipient of rent is an individual or HUF:

- rent of plant and machinery or equipment 10%

- rent of others, viz, property etc 15%

Where the recipient of rent is other than individual or HUF:

- rent of plant and machinery or equipment 10%

- rent of others, viz, property etc 20%

The above rates of TDS shall be increased by surcharge and cess as applicable. M/s XYZ & Co (before conversion), has to deduct tax at source @ 15% (plus cess @ 3%) at the time of payment of rent.

Particulars Amount (Rs.)Rent p.m 40,000Total rent (40,000*9 months) 3,60,000 TDS @15% 54,000Surcharge NilEducation cess @ 2% 1,080SHEC @ 1% 540Total tax to be deducted 55,620 M/s XYZ & Co (after conversion), need not deduct tax at source at the time of payment of rent, as the payment during the year for the company does not exceed Rs.1,20,000 and hence no liability to deduct tax at source. Consequences in case of non-deduction of tax

1. The rental expenditure will not be allowed as an expense. The expenditure is allowed in the year in which the actual payment of TDS is made.

2. Any person who is responsible to deduct tax at source and does not deduct the whole or any part of the tax or after deducting fails to pay the tax, such person shall be deemed to be an assessee in default in respect of the tax.

3. Every person responsible to deduct tax is expected to deduct tax, failing which the principal officer and the company shall be liable for the following consequences:

PAPL/ME27/PCC 23

i) Sec.201(1A) - Levy of interest @ 1% per month or part of the month on the amount of TDS from the date on which tax was deductible to the date on which such TDS was actually deducted. For example, where tax of Rs.10,000/- was deductible in the month of April’07 was actually deducted only in the month of January’08, interest @1% shall be levied for 9 months from May’07 to January’08 on Rs.10,000/-;

ii) Sec.221 – Levy of penalty equal to the amount of TDS not deducted; iii) Sec.271C - Levy of penalty equal to the amount of TDS not deducted;

3b

In the case of business reorganisation of co-operative banks, the unabsorbed losses and unabsorbed depreciation of the predecessor co-operative bank shall be the loss or depreciation of the successor co-operative bank.

Such loss shall be set off or carried forward for an unexpired period of the predecessor co-operative bank and unabsorbed depreciation shall be carried forward indefinetly.

The above provisions are subject to the following conditions:

1. Conditions to be satisfied by the predecessor co-operative bank:

a) it is engaged in the business of banking for three or more years; and

b) it has held continuously as on the date of business reorganisation atleast 3/4th of the book value of fixed assets held by it two years prior to the date of business reorganisation.

2. Conditions to be satisfied by the successor co-operative bank:

a) it holds continuously for a minimum period of 5 years from the date of business reorganisation at least 3/4ths of the book value of fixed assets of the predecessor co-operative bank acquired in a scheme of business reorganisation;

b) it continues the business of the predecessor bank for a minimum period of 5 years from the date of business reorganization.

EITHER

4a Computation of House Property of Mr.Y for the A.Y.2008 – 09

Particulars Amount in Rs.

Amount in Rs.

Gross Annual Value Higher of Municipal value and Rent Receivable for let out period of 9 months

30,000 or 1,80,000

1,80,000

Less: Municipal Taxes paid 6,000

Net Annual Value 1,74,000

Less: Deduction u/s. 24

(a) 30% of NAV (1,74,000 * 30%) 52,200

(b) Interest on capital

PAPL/ME27/PCC 24

Interest for the period 15,000

Prior period interest (20,000 * 1/5) 4,000 71,200

Income from House Property 1,02,800

4b

Computation of Capital Gain in hands of Mrs.Sowbagya for the AY 2008-09:

Particulars Amount (Rs.) Sale Consideration (500*850) 4,25,000Less: Expenses on transfer NilNet Consideration 4,25,000Less: Indexed Cost of Acquisition (Refer Note below)

1,64,806

Long Term Capital Gain 2,60,194

Note: Even the date of sale is not mentioned in the question, the gain will be long term capital gain as the shares were acquired during 1994 – 95 & 1999 – 00.

Computation of Indexed cost of acquisition

Cost of acquisition

Year of acquisition

Cost Inflation index (for year of acquisition)

Cost Inflation index (for year of sale)

Indexed Cost of acquisition

52,500 1994 – 95 259 551 1,11,68937,500 1999 – 00 389 551 53,117

Total 1,64,806

Computation of tax liability:

Assumption 1:

If the shares are listed in the stock exchange and suffered STT, then the LTCG is exempt u/s 10(38).

Assumption2:

If the shares are not listed in the stock exchange and does not suffered STT, then the tax will be computed as under:

Particulars Amount (Rs.) Long Term Capital Gain 2,60,194Tax liability @ 20% u/s.112 52,039Add: Education cess @ 3% 1,561

Total tax liability 53,600

PAPL/ME27/PCC 25

Tax Planning:

As the transferred asset is longterm capital asset, Mrs.Sowbagya can claim exemption u/s. 54EC or 54F.

Exemptions available in computation of capital gains Sec. Assessee Conditions Quantum of Exemption 54EC Any

Assessee 1) The asset transferred is a long term capital asset. 2) Within a period of 6 months from the date of

transfer, the amount of capital gains should have been invested in the specified bonds issued by Rural Electrification Corporation (REC) Limited or National Highways Authority of India (NHAI).

3) Assessee shall not transfer; or convert; or avail loan or advance on the security of the above bonds within a period of 3 years from the date of its acquisition.

4) The maximum amount of investment shall not exceed Rs.50 lakhs during any financial year.

Amount of investment in the specified bonds or the capital gains, whichever is lower.

54F Individual, HUF

1) The asset transferred is a long term capital asset, not being a residential house.

2) Within a period of 1 year before or 2 years after the date of transfer, a residential house is purchased or within a period of 3 years after the date of trans fer a residential house is constructed.

3) The assessee does not own more than one residential house on the date of transfer.

4) The assessee does not within a period of 1 year after the date of transfer purchase or does not within a period of 3 years after the date of transfer construct any residential house other than the new asset.

If the cost of the new residential house is not less than the net consideration then the whole of the capital gain. Other wise the capital gain in the same proportion as the cost of the new residential house bears to the net consideration.

OR

4(a) Computation of income under the head business or profession of MSN&Co for the AY 2008–

09:

Particulars Ref. Amount Rs.

Amount Rs.

Profit as per P & L a/c 10,.58,000Add: Expenditure incurred in cash 1 Nil Wealth tax paid 2 70,000 Advertisement expenses 3 5.00,000 Donations 4 2,75000 Rent 5 150 8,45,150 19,03,150

PAPL/ME27/PCC 26

Less: Amount received on sale of car 6 1,00,000 Interest on FD's 7 50,000 Weighted deduction @ 125% 8 88,000 2,38,000Income under Business or profession 16,65,150 Income under any other head - Other Sources

6 50,000

Gross Total Income 17,15,150Less: Deductions under chapter VI A - Donation – 80G

9

75,000

Net Total Income 16,40,150 Notes:

1. As per sec. 40A(3), any expenditure incurred during the previous year for a sum exceeding Rs.20,000/- otherwise than by a account payee cheque or account payee bank draft, the entire amount of expenditure shall be disallowed. In the present case, as the cash expenditure is exactly Rs. 20,000/- there shall not be any disallowance.

2. As per sec. 40(a), any sum paid towards wealth tax will not be a deductible expenditure. Hence, the amount of Rs. 70,000/- will be disallowed.

3. As per sec. 37(2B), any expenditure incurred by way of advertisement in any souvenir, brochure, pamphlet or the like published by a political party shall be disallowed. Hence, in the present case, amount incurred for such advertisement shall be disallowed.

4. Any expenditure in relation to personal nature shall not be considered as allowable expenditure. As the donations resembles personal nature, the entire amount has been disallowed.

5. As per sec. 40(a)(ia), if tax has not been deducted on rent, then such amount claimed as deduction shall be disallowed. Accordingly, an amount of Rs.150/- shall be disallowed as tax not been deducted on such payment.

6. Consideration received from sale of car should be deducted from the block of assets and shall not be credited to P & L account. Hence, the amount of Rs. 1 lakhs was deducted from the profit.

7. Interest received on FD's shall be treated as interest income which has to be taxed under the head other sources.

8. As per sec. 35, donations contributed to laboratory owned or financed by the Government, approved university, college or institution, National Laboratory or a University or to Indian Institute of Technology will qualify for weighted deduction of 125% of the amount contributed. (70,000*125%)

9. Donations eligible u/s. 80G is Rs.75,000/-. Due to absence of information, it is assumed that the donation is 100% eligible for the purpose of sec. 80G.

4(b) Resident: An individual is said to be resident in India in any previous year if he fulfills any one

of the following two basic conditions:

i) He is in India in that year for a period or periods amounting in all to 182 days or more ;

PAPL/ME27/PCC 27

ii) He is in India for a period or periods amounting in all to 60 days or more during the previous year and 365 days or more during the 4 years preceding that previous year.

Non-Resident: If an individual does not satisfy at least one of the basic conditions, he shall be considered as non-resident. Resident and Not Ordinarily Resident: In addition to fulfilling one of the above basic conditions, in case an individual fulfills any of the following additional conditions, he will be treated as “Not Ordinarily Resident” in India in that previous year : a) he has been a non-resident in India in 9 out of the 10 preceding previous years; OR

he has been in India for a period not exceeding 729 days during the 7 preceding Previous years.

Resident and Ordinarily Resident: In case an individual fails to satisfy both the conditions for not ordinarily resident, he shall be considered as resident and ordinarily resident.

5

(1).Computation of taxable income in the hands of Mr.Santhosh for the AY 2008 – 09:

Particulars Amount (Rs.) Rental income from letting of furniture 1,80,000Less: Depreciation 25,000Taxable income 1,55,000

1. The income received from letting of furniture will be taxed under the head other sources.

2. Depreciation can be claimed as deduction under section 57.

(2) According to sec. 64(1A), where the minor child is suffering from any disability of the nature specified in sec.80U, the income of such child shall not be included in the hands of the parent but shall be assessed in the hands of the child. Therefore, entire sum of Rs. 1,05,000/- shall be taxed in the hands of Mr.Kiran itself.

(3) Any person who has furnished a return u/s.139 (1) or in pursuance of a notice issued u/s.142(1) can file a revised return if the assessee discovers any omission or any wrong statement in the return filed earlier. Such revised return can be furnished at any time before the expiry of one year from the end of the relevant assessment year or before completion of assessment whichever is earlier.

Mr.Charan, an individual filed his return of income after due date (i.e., 31.07.2008) and hence cannot file revised return.

(4) As per sec. 234C, interest shall be paid, if advance tax paid falls short than actual amount that has to be paid. The following is the interest computation due to short fall of payment of advance tax.

Instalment

Total tax

liability

% Amount Payable

Amount for

instalment

Cumulative

amount

Shortfall

Rate of interest

No. of months

Interest

First 59,848/-

30% 17,954/- Nil Nil 17,954/-

1% 3 539/-

Second 59,848/ 60% 35,909/- 30,000/- 30,000 5,909 1% 3 177/-

PAPL/ME27/PCC 28

- /-Third 59,848/

- 100% 59,848/- Nil 30,000 29,84

8/-1% 1 298/-

Total interest u/s. 234C 1,014/-

(5) Rent Paid - Sec.80GG Eligible Assessee - Individual Rent paid is allowable as deduction to the extent of the least of the following: i) Excess of rent paid over 10% of total income ii) 25% of total income iii) Rs. 2,000 p.m.

Total income for this purpose means, gross total income as reduced by deductions under chapter VI-A except 80GG.

Conditions a) The assessee should not be in receipt of house rent allowance. b) The assessee, his spouse, or minor child or the HUF in which he is a member should not

own any residential accommodation at that place. c) No claim for self-occupied property should be made in respect of any accommodation. d) Assessee must file declaration in Form No.10BA wherein he confirms the details of rent

paid and fulfillment of the other conditions. (Rule 11B)

6 (1) Services provided to the following are exempt:

1. Reserve Bank of India 2. Small service provider (upto a turnover of Rs. 8 lakhs) 3. Entrepreneur in Technology Businesses Incubator (TBI) 4. Entrepreneur in Science and Technology Entrepreneurship Park (STEP)

(2) Returns are filed half yearly in Form ST-3. These returns can be filed either manually or by

way of e-filing. Hence, e-filing is not mandatory. (3) Pure agent is a person who has an agreement with the service receiver to act as his pure

agent to incur expenditure for providing service. The salient features of a pure agent are:

1. He has no title over the goods / services of the principal; 2. He cannot use them for his purpose; and 3. He gets from the service receiver only the actual cost of such purchases.

(4) Returns are filed half yearly in Form ST-3 [Form ST-3A for PA]. The half yearly due dates

are:

25th October for the half year ending 30th September; and 25th April for the half year ending 31st March.

(5) Gross Product Variant

Levy: Tax is levied on all sales i.e., every sale is taxed (/multi point Tax system)

PAPL/ME27/PCC 29

Deduction : Deduction is allowed on all raw materials. In other words, the manufacturer can take credit of tax paid on the raw materials purchased by him and set off such credit against the tax payable on his products. But deduction is not allowed on the Capital Goods. In other words, the manufacturer cannot take credit of tax paid on Capital Goods purchased by him for being set off against the tax payable on his products.

PAPL/ME27/PCC 30

(6) Invoice Method:

Features: a) Tax levied at every stage of sale b) Tax calculated on the total sale value at every stage of sale c) The quantum of tax worked out on the total value is passed on to buyer d) But the seller will deduct the tax suffered by his purchases and pay the balance only to Government.

7

(a) Liability to pay service tax arises only on receipt of actual consideration. The following table summarises the tax incidences:

Month Event Service Tax Due date for

payment October 2007 On Advance of Rs.

60,000/- [presumption: relates to taxable service]

60,000*12= 7,200/- add Education Cess @ 2% = 144 and Secondary and Higher Education Cess @ 1% = 72. Therefore total service tax payable is Rs. 7,416/-.

5th of November, 2007

March 2008 Balance Amount received Rs. 80,000/- (Refer note below)

80,000* 12 = 9,600 E. Cess @2% = 192 SHEC @ 1% = 96 Total tax = 9,888

31st of March, 2008

Note: Total value (presumably gross amount) = 2,10,000 Deduct Non-taxavle service = (70,000) Total taxable value = 1,40,000 Deduct advance = (60,000) Balance taxable value received = 80,000 (b) Demerits of VAT:

1. For getting the full benefit of VAT, there ought to be a single rate of VAT and all goods should fall under VAT. There are varying rates and some goods are out of VAT. Composition schemes and exemption schemes are also available. Thus 100% benefit of VAT is not gained because there are varying VAT rates and some goods are out of VAT system.

2. Neutrality is possible only if the purchases are made within state. No credit is given in

respect of CST i.e., purchases from outside the state. CST is yet to be integrated with VAT. Only then 100% benefit of VAT will accrue. Till CST is abolished, neutrality in purchases is not fully achieved.

3. Hitherto, under the old sales tax system, accounting focus was on sales only; and

purchases took a back seat. For getting, the benefit of set off, purchases should be clearly and completely accounted for. For small dealers such detailed accounting purchases will be a big burden.

PAPL/ME27/PCC 31

4. If the tax is collected at the first stage of sale the first seller pays tax and subsequent

sellers will not pay tax. They claim exemption under 'second sales'. The need for money to pay tax arises for the first seller only. Others are quite free. However if the tax is collected at the last stage of sale i.e., when goods are sold to consumer, the last seller alone should find money to pay tax. Earlier sellers need not bother about tax at all. Since tax is paid at every stage of sale in the VAT system every seller should find money to pay tax. The tax burden has an impact on their working capital.

5. Being a consumption tax, the burden f tax is the same for the poor as well as the rich.

The small purse of the poor cannot accommodate the heavy burden. In this regard VAT is undoubtedly regressive. Any consumption tax is bound to suffer from this weakness. Thus making the poor man bear the tax burden on par with the rich is an unavoidable demerit of VAT.

8 (a) Small Service Provider

1. Exemption granted through notification no. 6/2005 – ST dt: 01.03.2005 2. Exemption is upto a turnover (money received) of Rs. 8,00,000/- in a financial year 3. Cenvat credit on inputs, input service and capital goods cannot be availed during the

period of exemption. 4. On crossing the exemption limit of Rs. 8,00,000/- tax is payable at the usual rate and

cenvat credit can also be availed. 5. The service provider shall opt for the exemption. 6. Option is irreversible till the end of that financial year. 7. Registration is necessary if the turnover exceeds Rs.7,00,000/-. 8. For eligibility to opt for being SSP this year, the criterion is the value of services provided

last year. 9. Exemption is available in the current year, if in the previous year, the aggregate value of

taxable services provided does not exceed Rs.8,00,000/-. 10. For eligibility to avail exemption, the criterion is the value of services received in the

current year (exemption is upto Rs.8,00,000/-). (b) Documents to be attached along with the return of service tax (Form ST-3):

1. Copies of GAR-7 challans, for payments made. 2. Memorandum of ST-3A, incase of provisional payment of tax. 3. In case of first return, details of accounts maintained in relation to service tax should be

furnished to Superintendent of Central Excise, at the time of filing first half yearly return i.e. ST-3, a list of all accounts maintained by him in relation to service tax including memorandum received from his branch office.

(c) Merits of VAT

1. For claiming set-off the dealer should maintain proper accounts of purchases. There will be no suppression of purchases and hence tax evasion is ruled out.

2. What ever be the source of purchase set-off is equally available. All purchases carry credit and hence the system has anti-cascading effect. Thus neutrality is ensured in the selection of source of purchases.

3. The system is transaction based. VAT is applicable to all sales. No need to seek interpretation on turnover,sale,sale price etc. The simple equation is as follows: VAT payable = Tax on Sale – Tax on purchase.

PAPL/ME27/PCC 32

Thus there is certainty in the quantum of tax.

4. The amount of tax should be clearly indicated in the invoice. The buyer knows the amount he pays as tax. Government also knows the amount it gets as tax in every transaction. Thus, there is transparency in the system in regard to the quantum of tax.

5. At every stage of sale, Government gets the tax leviable on the transaction value at that stage. The balance due is realised at the last stage of sale i.e.,sale to consumer. Obviously, there is better revenue collection.

6. The system is self-policing. For getting credit on purchases, the dealer has to follow better accounting system. Otherwise, he will lose the benefit of set-off.

7. Thanks to the availability of the set-off the tax element on all inputs totally wiped out. Naturally, retail sale price decreases or atleast does not increase.

(d) Variants of VAT: Gross Product Variant Levy: Tax is levied on all sales i.e., every sale is taxed (/multi point Tax system) Deduction: Deduction is allowed on all raw materials. In other words, the manufacturer can take credit of tax paid on the raw materials purchased by him and set off such credit against the tax payable on hes products. But deduction is not allowed on the Capital Goods. In other words, the manufacturer cannot take credit of tax paid on Capital Goods purchased by him for being set off against the tax payable on his products. Income variant Levy: Tax is levied on all sales i.e., every sale is taxed (multi-point tax system). Deduction: Deduction is allowed on all raw-materials. In other words, the manufacturer can take the credit of tax paid on the raw materials purchased by him and set off such credit against the tax payable on his product. Deduction is allowed only on the depreciation of capital goods and not on the capital goods as such. In other words, credit cannot be taken in one shot when capital goods are purchased. However credit can be availed on a prodata basis as and when depreciation charged on plant and machinery. Consumption variant: Levy: tax is levied on all sales I.e every sale is taxed (multi-point tax sytem) Deduction: deduction is allowed on raw materials as well as capital goods. Deduction is allowed on raw materials as well as capital goods I.e on all purchases and set off such credit against the tax payable on his products.

PAPL/ME27/PCC 33

IM Total No. of Questions : 9 Max Marks : 100 No.of Pages : 3 Time Allowed : 3 Hours

Answers All Questions 1 (a ) Define any of the five terms briefly:

(i) Central Processing Unit (ii) BIOS (iii) Intelligent Terminal (iv) Seek Time (v) Subroutine (vi) File Pointers (1x 5 = 5 marks)

(b) Describe briefly, the following terms with reference to Information Technology:

(i) Flash Memory (ii) Clock Speed (iii) URL (iv) Duplex Printing (v) Asymmetric Crypto System (1x 5 = 5 marks)

(c) Give one or more reasons of use for each of the following:

(i) MICR (ii) SQL (iii) Use of USB port (iv) Use of Router (v) Use of Multiplexer (1x 5 = 5 marks)

(d) Write True or False for each of the following: a) Binary equivalent of a terminating decimal fraction need not be terminating. b) The largest number a computer can store depend on its ‘WORD LENGTH

c) Network database structure can be used to answer ad hoc queries.

d) One GB represents 10,48,567 bytes.

e) Laser printers speed is measured in PPM. (1x5=5 Marks)

2 Answer any two of the following:

(a) Describe various factors which must be considered in determining the best file organisation for a particular application.

(b) Briefly explain various types of communication services used to transmit data in a network. (c) Explain briefly various Disaster Recovery (DR) plans for eliminating Down Time.

(2 X 5 = 10 Marks) 3.

(a) What do you understand by the term “Data centre”? (3 Marks)

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(b) Data Centres can be classified into types and tiers according to varied computing needs they serve. Discuss them briefly. (7 Marks)

4.

A company offers discounts to customers on the following basis:

Quantity ordered Normal discount Less than 101 5% From 101 to 500 10% From 501 to 1,000 15% More than 1,000 20% The normal discount as given above is admissible only if the Customer’s account balance in below Rs. 1,000 and the order value is Rs. 10,000 or more. If the account does not satisfy both of these conditions, the discount is reduced by 2% and if only one condition is violated, the discount is reduced by 1%. Draw a Flow Chart to print customer name, discount offered and net amount payable for 25 customers.

(10 Marks) 6

(i) State with reasons which of the following statements are correct/incorrect (Attempt any three statements): (a) Customers and consumers represent same group of people. (b) Manufacturers can sell their products directly to the customers. (c) Strategies are rigidly defined. (d) Benchmarking relates to embossing organizational motif on the furniture.

(3 x 2 = 6 Marks) (ii) Briefly answer the following questions (any two) in 2-3 sentences each. (2 × 2 = 4 Marks)

a) What is social marketing? b) Explain concentric diversification. c) What is marketing mix?

7 What is SWOT? Discuss its significance in strategic analyses. (10 Marks) 8 Is competition good or bad? Explain Porter’s five forces model. (10 Marks)

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9 Case Study

SSS (Pvt) Ltd. was promoted nineteen years back as company manufacturing automobile parts with an investment of Rupees 5 crores by Abhishek Oberai. He took over as its chief executive and is occupying the same position till date. Abhishek an automobile engineer himself possessed rich experience of working abroad and in Hindustan Motors Ltd in India. He is dynamic and ready to take risk. He always emphasized on maintaining high quality standards. Initially, the products were supplied to automobile service centers all across the country.The market was small and the company suffered some losses. Eight years after its inception the company entered into an agreement with Maruti Udyog Ltd to manufacture and supply specific components for their small car. This agreement was a turning point for the company. Later the company was able to enter agreements with other companies entering India. The company is able to manage a growth rate of over 25% in last five years. Its turnover in the last financial year exceeded 800 crores. The overall market is also witnessing a very high growth rate. Abhishek also possessed strong behavioral skills and allowed some autonomy and discretion to the senior managers of the company. A year back in an internal meeting Abhishek felt that the company can grow still faster if it enters other markets outside India. Various options were analysed and efforts were made to discuss and negotiate with major manufacturers of the world. Getting some response from two manufacturers in European Union the company opened an office in London. Abhishek closely monitored the day-to-day working of this office. Having strategic implications all major decisions were taken by himself. He will also visit London every month to have first hand information about its working. However, as the company is growing it is becoming increasing difficult for him to manage this office. He also wants to expand further. He called a meeting with head of various department. In the meeting following alternatives were considered for foreign market: ♦ Continue to manufacture products in India and export them to other countries. ♦ Initiate manufacturing activities in other countries. ♦ Takeover existing manufacturers of the products.

Answer the following questions:

(a) Write a note on reasons for SSS Ltd to open office in London? (6 Marks) (b) What should be the strategy of the company in a high growth market? Why? (7 Marks) (c) Make an analysis of various alternatives that are being considered for expanding in

foreign markets? (7 Marks)

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PRIME ACADEMY 27 –Session PCC

INFORMATION TECHNOLOGY & STRATEGIC MANAGEMENT SUGGESTED ANSWERS

1 (a )

(vii) Central Processing Unit The heart of any computer is the CPU. It is this central processor that makes comparison, performs calculations, reads, interprets and controls the execution of instructions. It consists of three separate components

1. The control unit 2. The arithmetic and logical unit 3. Primary Storage

(viii) BIOS Stands for Basic Input Output System. It is a small chip on the Motherboard that includes start up code, the set up program and also loads the hardware settings required to operate various devices like key board, monitor , disk drives,etc

(ix) Intelligent Terminal

It has an in built processing capability. It is also user programmable. In addition to the storage areas, it has a micro processor, which can be programmed to communicate with and instruct the user who is entering data

(x) Seek Time

This is the time required to position a movable read-write head over the recording track to be used. If the read-write head is fixed, this time will be zero.

(xi) Subroutine

A subroutine is a subset of instructions that are called or executed from a main program or finds applications in several programs. It is economical to write it once. Subroutines may be incorporated in the main program from a library of subroutines.

(xii) File Pointers

File pointers establish linkage between records and are a basic part of the file organization of all the database models except the relational model. A pointer is the address of another related record that is “pointed to”. The pointer directs the computer to that related record. It is placed in the last field of a record, if more than one pointer is used, then in the last fields.

(b)

a) Flash Memory: Flash Memory is a memory in which the data is recorded permanently and is not wiped out when the power is turned off. Flash memory devices are very fast because they do not have any moving part.

b) Clock Speed: Clock Speed is the speed at which the processor executes instructions. It is

measured in megahertz (MHz) which is equal to million cycles per second. Higher the clock speed, faster will be the processor and better will be the system’s performance

c) URL: URL stands for Uniform Resource Locator. It is an address which is used to access

individual web pages and Internet resources located on the web servers. The format of a URL is as follows:

Protocol://Internet Address/Web page Address d) Duplex Printing: Printing on both sides of a paper at the same time is called Duplex Printing.

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e) Asymmetric Crypto System: In this cryptography technique, both the parties use different keys for encryption/decryption. The key known to the sender is called Private key and receiver key is called Public key. A person using asymmetric crypto system publishes his Public key so that it can be known to all the persons who want to confirm the identity of the sender.

(C) (i) MICR: MICR stands for Magnetic Ink Character Recognition. It allows the computer to

recognize characters printed using magnetic ink. This technology is used to read electronic numbers printed on the bottom of the cheque.

(ii) SQL: SQL stands for Structured Query Language. It is a query language having a set of easy

to use commands for creating, updating, deleting, and accessing data from a database. It allows end users to perform ad hoc queries on the database interactively without the aid of programmers.

(iii) Use of USB port: USB stands for Universal Serial Bus. These ports provide the user with

higher data transfer speeds for different USB devices like keyboard, mouse, scanners or digital camera.

(iv) Use of Router: Router is a special purpose computer or software package that handles

the connection between two or more networks. Routers spend all their time looking at the destination addresses of the packets passing through them and deciding on which route the packets should be sent.

(v) Use of Multiplexer: This is a device that enables several devices to share one

communication line. It scans each device to collect data for transmission on a single communication line. It is often used with a complementary demultiplexer on the receiving end. As such it restricts the need of multiple communication lines

(d)

f) TRUE

g) TRUE

h) FALSE

i) FALSE

j) TRUE

2

(a) Describe various factors which must be considered in determining the best file organisation for a particular application. Following factors determine the best file organization for a particular application: 1. File volatility: It refers to the number of additions and deletions to the file in a given period of time. The

payroll file for a construction company where the employee roster is constantly changing is a highly volatile file. In this situation, perhaps sequential file organization would be appropriate if there were no interrogation requirements.

2. File activity: It is the proportion of master file records that are actually used or accessed in a given

processing run. At one extreme is the real-time file where each transaction is processed immediately and hence at a time, only one master record is accessed. This situation obviously requires a direct access method. At the other extreme is a file, such as a payroll master file, where almost every record is accessed when the weekly payroll is processed. There ,a sequentially ordered master file would be more efficient.

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3. File interrogation: It refers to the retrieval of information from a file. If there trieval of individual records must be fast to support a real-time operation such as airline reservation then some kind of direct organization is required. If ,on the other hand, requirements for data can be delayed, then all the individual requests or information can be batched and run in a single processing run with a sequential file organization.

4. File size: Large files that require many individual references to records with immediate response must

be organized under some type of direct access method. On the other hand, with small files, it may be more efficient to search the entire file sequentially or, with a more efficient binary search, to find an individual record than to maintain complex indexes or complex direct addressing scheme.

(b) Communication Services: An organisation that wishes to transmit data uses one of the common carrier services to carry the messages from station to station. Some of the common types of communication services used to transmit data in a network are:

a. Narrow Band Service: It is used where data volume is relatively low. The transmission rates

usually range from 45 to 300 bits per second. Examples of this service are telephone companies, typewriters exchange service (TWX) and Telex service.

b. Voice Band Service: Voice band services use ordinary telephone lines to send data messages.

Transmission rates vary from 300 to 4,800 bits per second, and higher.

c. Wide Band Service: Wide band services provide data transmission rates from several thousands to several million bits per second. These services are limited to high-volume users. Such services generally use coaxial cable or microwave communication.

Communication Services may be either leased or dial up. A leased communication channel, which gives the user exclusive use of the channel, is used where there are continuing data transmission needs. The dial up variety requires the person to dial the computer. This alternative is appropriate when there are periodic data to be transmitted.

(C ) Disaster Recovery (DR) Plans: Data centres need to be equipped with the appropriate disaster recovery

system that minimizes downtime for its customers. The following different types of disaster recovery plans are used:

1. Cold site: An alternative facility that is devoid of any resources or equipment, except air conditioning and raised flooring. Equipment and resources must be installed in such a facility to duplicate the critical business functions of an organization. Cold sites may have variations depending on their communication facilities.

2. Warm site: An alternate processing site that is only partially equipped, as compared to a hot site, which is fully equipped. It may have shared or dedicated server.

3. Hot site: An alternative facility that has the equipment and resources to recover business functions that are affected by a disaster. Hot sites may vary in the type of facilities offered such as data processing, communication, or other critical business functions which need duplication. The location and size of the hot site must be proportional to the equipment and resources needed.

3.

(a) A data centre is a centralized repository for the storage, management and dissemination of data and information. Data centres can be defined as highly secure, fault-resistant facilities, hosting customer equipment that connects to telecommunications networks. Often referred to as an Internet hotel/ server farm, data farm, data warehouse, corporate data centre, Internet service provider (ISP) or wireless application service provider (WASP), the purpose of a data centre is to provide space and bandwidth connectivity for servers in a reliable, secure and scaleable environment. These data centres are also referred to as public data centres because they are open to

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customers. Captive, or enterprise data centres, are usually reserved for the sole and exclusive use of the parent company, but essentially serve the same purpose. These facilities can accommodate thousands of servers, switches, routers and racks, storage arrays and other associated telecom equipment. A data center also provides certain facilities, like housing websites, providing data serving and other services for companies. This kind of data center may contain a network operations center (NOC), which is a restricted access area containing automated systems that constantly monitor server activity, Web traffic, network performance and report even slight irregularities to engineers, so that they can spot potential problems before they happen. They primary ‘goal’ of a data center is to deploy the requisite state-of-the-art redundant infrastructure and systems so as to maximize availability and prevent or mitigate any potential downtime for customers.

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(b)

Types and Tiers : According to the varied computing needs of the businesses they serve, data centers fall into following two main categories: i. Private Data Centre: A private data center (also called enterprise data centers). Is managed by the organization’s own IT department, and it provides the applications, storage, web-hosting, and e-business functions needed to maintain full operations. If an organization prefers to outsource these IT functions, then it turns to a public data center. (ii) Public data centers: A public data center (also called internet data centers) provide services ranging from equipment colocation to managed web-hosting. Clients typically access their data and applications via the internet. Typically, data centers can be classified in tiers, with tier 1 being the most basic and inexpensive, and tier 4 being the most robust and costly. The more ‘mission critical’ an application is, the more redundancy, robustness and security are required for the data center. A tier 1 data center does not necessarily need to have redundant power and cooling infrastructures. It only needs a lock for security and can tolerate upto 28.8 hours of downtime per year. In contrast, a tier 4 data center must have redundant systems for power and cooling, with multiple distribution paths that are active and fault tolerant. Further, access should be controlled with biometric reader and single person entryways; gaseous fire suppression is required; the cabling infrastructure should have a redundant backbone; and the facility must permit no more than 0.4 hours of downtime per year.

Tier 1 or 2 is usually sufficient for enterprise data centers that primarily serve users within a

corporation. Financial data centers are typically tier 3 or 4 because they are critical to our economic

stability and, therefore must meet the higher standards set by the government. Public data centers that

provide disaster recovery/backup services are also built to higher standards.

4.

A company offers discounts to customers on the following basis:

Quantity ordered Normal discount Less than 101 5% From 101 to 500 10% From 501 to 1,000 15% More than 1,000 20%

The normal discount as given above is admissible only if the Customer’s account balance in below Rs. 1,000 and the order value is Rs. 10,000 or more. If the account does not satisfy both of these conditions, the discount is reduced by 2% and if only one condition is violated, the discount is reduced by 1%. .

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5 (i)

(a) Customers and consumers represent same group of people..

Incorrect: A customer is the person who buys the product. Consumer is the one who ultimately consumes or uses the product. Head of family may buy products as customer and his family who actually uses the product will be consumer.

(b) Manufactuers can sell their products directly to the customers. Correct: The statement reflect to the concept of direct marketing. Organizations do marketing through various advertising media that interact directly with consumers, generally calling for the consumer to make a direct response. Direct marketing includes channels such as Catalogue Selling, Mail, Telecomputing, Electronic, Marketing, Shopping, and TV shopping.

(c) Strategies are rigidly defined

Incorrect: In the dynamic environment it is necessary that the strategies are action oriented and flexible enough to take on the changes in the environment. In a sound strategy allowances are made for possible miscalculations and unanticipated events.

(d) Benchmarking relates to embossing organisational motif on the furniture

Incorrect: Benchmarking is an approach of setting goals and measuring productivity based on best industry practices. It developed out of need to have information against which performances can be measured. Benchmarking helps in improving performance by learning from best practices and the processes by which they are achieved.

(ii)

(a) Social Marketing refers to the design, implementation, and control of programs seeking to increase the acceptability of a social ideas, cause, or practice among a target group.For instance, the publicity campaign for prohibition of smoking in Delhi explained the place where one can and can’t smoke in Delhi.

(b) In concentric diversification, the new business is linked to the existing businesses through

process, technology or marketing. The new product is a spin-off from the existing facilities and products/processes. In concentric diversification there are benefits of synergy with the current operations.

(c) Marketing mix is the set of controllable marketing variables that the firm blends to

produce the response it wants in the target market. The marketing mix consists of everything that the firm can do to influence the demand for its product. Primarily, these variables are often referred to as the “four Ps” – Product, Price, Place, Promotion

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6

Strategic thinking requires generation of a series of strategic alternatives given the company's internal strengths and weaknesses and its external opportunities and threats. The comparison of strengths, weaknesses, opportunities, and threats is normally referred to as a SWOT analysis Strength: Strength is an inherent capability of the organization which it can use to gain strategic advantage over its competitors. Weakness: A weakness is an inherent limitation or constraint of the organization which creates strategic disadvantage to it. Opportunity: An opportunity is a favourable condition in the organisation’s environment which enables it to strengthen its position. Threat: A threat is an unfavourable condition in the organisation’s environment which causes a risk for, or damage to, the organisation’s position. The significance of SWOT analysis lies in the following points: It provides a Logical Framework: SWOT analysis provides us with a logical framework for systematic and sound thrashing of issues having bearing on the business situation, generation of alternative strategies and the choice of a strategy. Variation in managerial perceptions about organizational strengths and weaknesses and the environmental opportunities and threats lead to differences is approaches to specific strategies and finally the choice of strategy that takes place through an interactive process in dynamic backdrop. It presents a Comparative Account: SWOT analysis presents the information about both external and internal environment in a structured form where it is possible to compare external opportunities and threats with internal strengths and weaknesses. The helps in matching external and internal environments so that a strategist can come out with suitable strategy by developing certain patterns of relationship. The patterns are combinations say, high opportunities and high strengths, high opportunities and low strengths, high threats and high strengths, high threats and low strengths. In case a different strategy is needed, as situation varies. It guides the strategist in Strategy Identification: It is natural that a strategist faces a problem when his organization cannot be matched in the four patterns. It is possible that the organization may have several opportunities and some serious threats. It is equally, true that the organization may have powerful strengths coupled with major weaknesses in the light of critical success factors. In such situation, SWOT analysis guides the strategist to think of overall position of the organization that helps to identify the major purpose of the strategy under focus.

7 Although competition makes organizations work harder, intense competition is neither a coincidence nor bad luck. All

organizations have competition. Multinationals and large organizations clash directly on every level of product and service. Mid-sized and small business also chase same customers and find that prices and product quality are bounded by the moves of their competitors. Even large public sector monopolies are gradually getting privatised and facing competition. The monopolies enjoyed by the Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd have faded away after entry of private players. For a single business organization the competition spells out freedom of entry and exit in the market and affects its prices and scale of operations The benefit of competition are also enjoyed by the markets in which organizations operate. The customers are able to get products at lower costs and better quality. They get better value of their money because of competition.

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Porter’s Five forces Model To gain a deep understanding of a company’s industry and competitive environment, managers do not need to gather all the information they can find and waste a lot of time digesting it. Rather, the task is much more focused. Thinking strategically about a company’s competitive environment entails using some well defined concepts and analytical tools. A powerful and widely used tool for systematically diagnosing the significant competitive pressures in a market and assessing the strength and importance of each is the Porter’s five-forces model of competition. This model holds that the state of competition in an industry is a composite of competitive pressures operating in five areas of the overall market:

Competitive pressures associated with the market manoeuvring and jockeying for buyer patronage that goes on among rival sellers in the industry.

Competitive pressures associated with the threat of new entrants into the market.

Competitive pressures coming from the attempts of companies in other industries to win buyers over to their own substitute products.

Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration.

Competitive pressures stemming from buyer bargaining power and seller-buyer Collaboration. The way one uses the five-forces model to determine what competition is like in a given industry is to build the picture of competition in three steps: Step 1: Identify the specific competitive pressures associated with each of the five forces. Step 2: Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak). Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.

Threat of new entrants: New entrants are always a powerful source of competition. The new capacity and product range they bring in throw up new competitive pressure. And the bigger the new entrant, the more severe the competitive effect. New entrants also place a limit on prices and affect the profitability of existing players. Bargaining power of customers: This force will become heavier depending on the possibilities of the buyers forming groups or cartels. Mostly, this is a phenomenon seen in industrial products. Quite often, users of industrial products come together formally or informally and exert pressure on the producer in matters such as price, quality and delivery. Bargaining power of suppliers: Quite often suppliers, too, exercise considerable bargaining power over companies. The more specialised the offering from the supplier, greater is his clout. And, if the suppliers are also limited in number they stand a still better chance to exhibit their bargaining power. The bargaining power of suppliers determines the cost of raw materials and other inputs of the industry and, therefore, industry attractiveness and profitability. Rivalry among current players: The rivalry among existing players is an idea that can be easily understood. This is what is normally understood as competition. And it is obvious that for any player, the competitors influence prices as well as the costs of competing in the industry, in production facilities product development, advertising, sales force, etc. Threats from substitutes: Substitute products are a latent source of competition in an industry. In many cases they become a major constituent of competition. Substitute products offering a price advantage and/or performance improvement to the consumer can drastically alter the competitive character of an industry. And they can bring it about all of a sudden. For example, coir suffered at the hands of synthetic fibre. Wherever

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substantial investment in R&D is taking place, threats from substitute products can be expected. Substitutes, too, usually limit the prices and profits in an industry.

8

Note:

There is no rigid solution to the case problem. You can arrive at your own solutions. The

opinions differ and your approach will also be different. However, you must offer

supporting evidence for your views and judgements. You should draw inferences from

theoretical concepts of strategic management and integrate them in the decisions. You

should not rely upon unsupported opinions and over generalisations and clearly

demonstrate that your interpretations are reasonable, logical and objective