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CS Professional · Strategic Management and Corporate Finance · Analyzing the External and Internal Environment

Surya Appliances Ltd has a value chain with these annual costs: inbound logistics Rs 12 crore, operations Rs 30 crore, outbound logistics Rs 8 crore, marketing and sales Rs 10 crore, service Rs 5 crore, procurement Rs 4 crore, technology development Rs 6 crore, HR Rs 3 crore and infrastructure Rs 2 crore. Customers collectively pay Rs 100 crore. If management cuts operations cost by 10% and service cost by 20%, what is the new margin?

The new margin is Rs 24 crore. Total costs are Rs 80 crore, giving a margin of Rs 20 crore. Cutting operations by Rs 3 crore and service by Rs 1 crore lowers costs to Rs 76 crore, so margin rises to Rs 100 crore minus Rs 76 crore.

  1. ARs 20 crore
  2. BRs 24 croreCorrect
  3. CRs 21 crore
  4. DRs 25 crore

Explanation

Total cost = 12+30+8+10+5+4+6+3+2 = 80, so original margin is 20. Savings: 10% of 30 = 3 and 20% of 5 = 1, total 4. New cost = 76, margin = 100-76 = 24 crore. Rs 25 crore would wrongly use 20% on operations (saving 6) or ignore the base; Rs 21 crore saves only 1.

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