Strategic Revenue Management

MCQ’s

STRATEGIC REVENUE MANAGEMENT

CHAPTER 6
Question 1: Which of the following is true for CVP analysis done in Just in Time
environment (procurement and production) using pull system of supply chain?
i. Direct labour is considered as fixed instead of variable
ii. Direct material varies with production volume
iii. Waste scrap and quantity discounts are removed
iv. Decrease the size of production runs

A i and ii B ii and iv C ii, iii and iv D i, ii, iii and iv

Question 2: A company has used Kano Model to understand the correlation between
product features and customer satisfaction. If it is facing a constraint of direct labour
hours, in which order should the company include the feature while manufacturing the
product? All features require direct labour hours. Manufacture to include feature i.e., -A
company has used Kano Model to understand the correlation between product features
and customer satisfaction. If it is facing a constraint of direct labour hours, in which order
should the company include the feature while manufacturing the product? All features
require direct labour hours. Manufacture to include feature i.e., -

A first threshold attribute, second delight attribute, and lastly Indifference qualities

B first a performance attribute, second delight attribute, and lastly threshold attribute

C first excitement attribute, second threshold attribute, and lastly reverse feature

D first reverse feature, second delight attribute, and lastly indifference qualities

Question 3: Identify the attribute that can be classified as indifference attribute to a

retail customer of a bank under the Kano Model

A Reduction of limit of a credit card issued by a bank

B Ability to receive One Time Password (OTP) reliably on the mobile to execute net bank
transactions

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C Action within an hour on service requests placed online using net banking services of
the bank

D Cost of embossing the credit card issued by the bank

Question 4: Match the pricing with the scenario in the following cases –
i. Customized product a. Going rate pricing

ii. Perfect competition b. Sealed bid pricing

iii. Defence contract work/ Infrastructure projects C. Cost based pricing

iv. Pharma companies, oligopolistic market with few players d. Collusion pricing

A i-c, ii-a, iii- b, and iv-d B i-d, ii-b, iii- c, and iv- a

C i-a, ii- c, iii-d, and iv-b D i-c, ii- b, iii-d, and iv-a

Question 5: O makes lotion for the body to soothe dry skin in the winter. Y received a
10% discount from O on lotion purchases, while Z received a 15% discount. The nature of
their dealings was the only distinction between the two, as their order sizes were identical.
While Z only offered the lotions for wholesale, Y sold them in the retail market.
Which kind of discount was approved by 0?

A discounts for quantity B discounts for price differentiation

C discounts for trade D discounts for distributors

Question 6: As per market research, when the selling price of a product is Rs.80,000 per
unit there will be no demand. For every Rs.10,000 reduction in selling price from Rs.80,000
per unit, 2 additional units can be sold. The variable cost to manufacture the product is
Rs.50,000 per unit.
The selling price that will maximize the profit for this product will be:

A Rs.60,000 per unit B Rs.65,000 per unit

C Rs.70,000 per unit D Rs.75,000 per unit

Question 7: The Gifts Company makes mementos for offering chief guests and other
dignitaries at functions. A customer wants 4 identical pieces of hand-crafted gifts for 4
dignitaries invited to its function.

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For this product, the Gifts Company estimates the following costs for the 1st unit of the
product –
Particulars of Costs Rs./ unit
Direct Variable Costs (excluding labour) 2000
Direct Labour (20 hours @ Rs.50/ hour) 1000
90% learning curve ratio is applicable, and one labourer works for one customer's order.
Calculate price per piece (in Rs.) to be quoted for this customer if the targeted
contribution is 1,500 per unit?

A 4,310 B 4,400 C 17,240 D 17,600

Question 8: Which of the following factors will make the customer more sensitive towards
the price of a product?

A Higher perceived quality of the B High perishability of the product

product

C Difficulty in comparison of the product D High proportion of expenditure

with its alternatives (product cost) to the customer income

Question 9: In which market should the firm consider not just the demand for the
product but also predict the resultant reaction of its rivals or competitors on any decision
it takes?

A Perfect Competition B Monopolistic Competition

C Oligopoly D Monopoly

Question 10: Match the price discount with their characteristics –

i. Distributor's discount a. Useful in trades where credit risk is high

ii. Quantity discount b. Create different prices to different

customers on the basis of marketing functions
performed by them
iii. Cash discount c. Channel partners are encouraged to promote
company's products (incentive to push a
product) customer to

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iv. Trade in allowance / promotional d. Practicable where the commodities are

allowance homogeneous or identical in nature, or where
they may be measured terms truckloads
measured physical units in of or in

A i-b, ii-d, iii-a, iv-c B i-c, ii-d, iii-a, iv-b

C i-c, ii-d, iii-b, iv-a D i-d, ii-a, iii-b, iv-iii

Question 11: Six years ago material M cost $5 per kg and the price index most
appropriate to the cost of material M was 110. The same index now stands at 550.
What is the best estimate of the current cost of material M per kg?

A $20.00 B $55.00 C $50.00 D $25.00

Question 12: Which of the following is not a drawback of cost based pricing approach?

A There is no incentive for managers to operate in a cost efficient way

B The pricing method does not consider the customer’s value perception about the
product

C It ignores the structure of the market in which the firm operates

D It requires market research to understand competitor’s strategy

Question 13: Modern Gas Limited deals in liquid nitrogen (a standardised product). NGL
pay less attention to its own costs or demands and bases its price largely on competitor's
prices. The Pricing method adopted by MGL is -

A Value pricing B Psychological Pricing

C Going rate pricing D Image pricing

Question 14: Which of the following is not a promotional pricing that is used to coax
buyers to make an early purchase?

A Longer payment terms B Special event pricing

C Loss leader pricing D Price skimming

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Question 15: Business may charge higher price to enhance their revenue by striving for
to include those features which has higher capability to please the customer; while exclude
those have negative impact on value perceived.
Correctly match the items of following sets
i. Features your product needs a. Performance attributes
to be competitive
ii. More investment in these b. Excitement / Delight/ attributes
features, more satisfaction
the customer gets
iii. Features provide satisfaction c. Threshold (Basic) attributes
when met but do provide
dissatisfaction when not met
iv. Features that have no effect d. Reverse qualities
on customer satisfaction
v. Features if present cause e. Indifference qualities
customer dissatisfaction

A i-a, ii-b, iii- c, iv-e, v-d B i-c, ii-a, iii-b, iv-e, v-d

C i-c, ii-a, iii-b, iv-d, v-e D i-d, ii-a, iii-e, iv-b, v-c

Question 16: S Limited is engaged in manufacturing activities. It has received a request

from one of its important customers to supply a product which will require conversion of
material 'M', which is a non-moving item.
The following details are available:
Book value of material 'M' Rs.60
Realisable value of material 'M' Rs.80
Replacement cost of material 'M' Rs.100
It is estimated that conversion of one unit of 'M' into one unit of the finished product will
require one labour hour. At present, labour is paid at the rate of Rs.20 per hour. Other
costs are as follows:
Out-of-pocket expenses Rs.30 per unit
Allocated overheads Rs.10 per unit
The labour will be re-deployed from other activities. It is estimated that the temporary
redeployment will not result in loss of contribution. The employees to be re- deployed are
permanent employees of the company.
The minimum price (in Rs.) to be charged from the customer so that the company is not
worse off by executing the order

A 90 B 110 C 120 D 140

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Question 17: A company has used the Kano Model to identify the product features and
correlate them to customer satisfaction. It is having a funding constraint for
manufacturing the product. Now, it has to decide between investing in Feature 1 and
Feature 2, both of which are significant product features. Feature 1 has a threshold
attribute while Feature 2 has a performance attribute. The company does not have enough
funds to invest in both these features.
How should the company decide to allocate between the features?

A It should first invest in Feature 1 and any surplus is invested in Feature 2

B It should first invest in Feature 2 and any surplus is invested in Feature 1

C It can split between Feature 1 and 2 equally (even if the cost of manufacturing does
not sufficiently cover either feature)

D It need not invest in either Feature 1 or Feature 2

Question 18: PowerOn manufactures batteries that power medical devices like medical
imaging systems, defibrillators, ventilators and monitoring devices. PowerOn has
customers who are medical equipment manufacturers who use these while making medical
devices and machines. Bataid is the latest model of battery that PowerOn has developed.
It is safe, stable and longer lasting. These are very important attributes since the
performance of medical devices can get affected by them. PowerOn wishes to arrive at a
price for Bataid batteries. The market has many similar batteries available. However,
Bataid is of a much higher quality as compared with the rest. The nearest comparable
battery is Bat 1.
Particulars Bataid Bat 1
Operating per hour Rs. 2 per hour Re. 1 per hour
Probability battery failing 1% 11%
Price of a battery per unit ? Rs. 20,000
Due to the critical nature of the medical devices in which it is used, the cost of a battery
failing to the buyer has been arrived as Rs.1,00,000. Both batteries Bataid and Bat 1 can
be used for an average of 8,000 hours.
Calculate the probable price (in Rs.) PowerOn can charge the medical equipment
manufacturer based on the True Economic Value method.

A 38,000 B 18,000 C 23,000 D 22,000

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Question 19: Given data about Price (P) and quantity demanded (Q) given the following
sales and demand data –
Selling Price per unit (P) Number of units sold (Q)
Rs. 100 500
Rs. 90 480
Find the linear relationship between Pand

A P = 350 - 0.5Q B Q = 350 - 0.5P

C P = 350 + 0.5Q D Q = 350 + 0.5P

Question 20: Mr. YEE is a management accountant for a not for profit organization that
provides subsidized homes for the lower income groups of the society. He is in charge of
finance, budgets, and MIS reporting at this organization. In the course of his work, he
comes to know that the construction of home is being done with substandard material in
order to keep the costs within budgets.
Which of the following is true?

A The use of substandard material in construction is not of relevance since it is outside

the domain of management accounting

The use of substandard material is relevant since it does affect the customer service
B quality (the beneficiaries from the lower income groups) whose service is the main
objective of not for profit organization. This is a non-financial consideration in MIS
reports

C The information can be ignored because it does not impact the budgets adversely

D The use of substandard material in construction will not have a long term consequence
to the organization

Question 21: Categorize the services based on the nature service involved –
i. Fitness Centre a. Product/possession processing service
ii. Warehousing b. Mental stimulus processing service
iii. Advertising c. People processing service
iv. Knowledge Processing Offices (KPO) d. Information processing service

A i-a, ii-b, iii- c, iv-d B i-b, ii-a, iii- c, iv-d

C i-a, ii-b, iii- d, iv-c D i-c, ii-a, iii-b, iv-d

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Question 22: A Singaporean company manufactures Products A, B and C, they are joint
products. C has no realizable value unless it is processed further after the point of
separation. The cost details are as follows
Cost upto the point of separation per unit $80
Processing after separation -
Additional Marginal cost per unit $80
Additional Fixed cost per unit $20
Product C can be sold for $150 per unit and no more.
Should Product C be processed further?

A Yes, because each unit of Product C sold contributes $50 per unit towards recovery
of joint cost

B Yes, because each unit of Product C sold contributes $70 per unit towards recovery
of joint cost

C No, because each unit of Product C sold yields loss of $30

D No, because each unit of Product C sold yields loss of $10

Question 23: An airline company had to ground 25% its fleet operations. This was due to
low passenger traffic due to economic recession. The company has started incurring losses
because of this. The management has convened to decide whether to temporarily shut
down operations for few months until there is a spike in air travel.
Pilots of the company are highly skilled, and a lot of investment has been made in training
them. Hence, they will continue to be part of the workforce and their regular salary will
be paid each month. Ground staff are lesser skilled. The job market can provide the
requisite candidates when the company plans to re-hire once normal operations begin.
Hence, the company has decided to retrench 30% of its ground staff. They will be paid
retrenchment compensation of 2 month's salary. Planes that have been grounded need to
be maintained continuously in order to be capable of being put into operation when normal
operations resume. Due to the nature of the engine, special maintenance cost will need to
be incurred in addition to regular maintenance cost in order to keep it in working condition.
Planes will continue to be parked at the airport hangar for which the company will pay fees.
Which of the following will be the relevant items to be considered while deciding on the
scenario of this temporary shut down?
i. Salary paid to pilots for the period when the planes are grounded
ii. Savings of salary cost of 30% of ground staff who have been let go

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[Link] compensation of 2 months salary paid to the ground staff who have
been let go
iv. Special maintenance cost to ensure that engines of grounded fleet remain in working
condition
v. Airport hangar parking fees

A ii, iii, iv B i, ii, iii and iv C i, ii, iii and v D ii, iii, iv and v

Question 24: XL Polymers, located in Sahibabad Industrial Area, manufactures high

quality industrial products. AT Industries has asked XL Polymers for a special job that
must be completed within one week.
Raw material R₁ (highly toxic) will be needed to complete the AT Industries' special job.
XL Polymers purchased the R₁ two weeks ago for Rs.7,500 for a job 'A' that recently was
completed. The R₁ currently in stock is the excess from that job and XL Polymers had
been planning to dispose of it. XL Polymers estimates that it would cost them Rs.1,250 to
dispose of the R₁. Current replacement cost of R₁ is Rs.6,000.
Special job will require 250 hours of labour G and 100 hours of labour G 2. XL Polymers pays
their G₁ and G₂ employees Rs.630 and Rs.336 respectively for 42 hours of work per week.
XL Polymers anticipates having excess capacity of 150 [G₁] and 200 [G2] labour hours in
the coming week. XL Polymers can also hire additional G₁ and G₂ labour on an hourly basis;
these part-time employees are paid an hourly wage based on the wages paid to current
employees.
Suppose that material and labour comprise XL Polymers's only costs for completing the
special job.
'Minimum Price' in that XL Polymers should bid on this job

A 250 B 500 C 1,500 D 1,750

Question 25: OOL has developed a new product which is about to be launched into the
market. The variable cost of selling the product is 17 per unit. The marketing department
has estimated that at a sale price of 25, annual demand would be 10,000 units. However,
if the sale price is set above 25, sales demand would fall by 500 units for each 0.50
increase above 25. Similarly, if the price is below '25, demand would increase by 500 units
for each 0.50 stepped reduction in price below 25.
The price (in') and corresponding quantity (in units), which would maximise OOL's profit
in the next year –

A Price- 26.00; Quantity- 9,000 B Price-26.50; Quantity- 8,000

C Price-26.50; Quantity- 9,000 D Price- 25.50; Quantity- 8,000

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Question 26: Cafe coffee hub offer a feature of writing name of customer on the
takeaway glass down under the logo of CCH, the size of logo of CCH on glass of coffee is
which type of attribute (referring to Kano Model)?

A Reversal B Delighter C Performance D Indifferent

Question 27: COO of Modern Furniture Limited heard about Kano Model. MFL decided to
use Kano Model to enhance customer satisfaction; but not sure which attribute of Kano
Model need to be focused mainly (in priority over others) in order to enhance the
willingness to pay. customer's

A Reversal B Delighter C Performance D Indifferent

Question 28: PowerOn manufactures batteries that power medical devices like medical
imaging systems, defibrillators, ventilators and monitoring devices. PowerOn has
customers who are medical equipment manufacturers who use these while making medical
devices and machines. Bataid is the latest model of battery that PowerOn has developed.
It is safe, stable and longer lasting. These are very important attributes since the
performance of medical devices can get affected by them. PowerOn wishes to arrive at a
price for Bataid batteries. The market has many similar batteries available. However,
Bataid is of a much higher quality as compared with the rest. The nearest comparable
battery is Bat 1.
Particulars Bataid Bat 1
Operating cost per hour S$2 per hour S$1 per hour
Probability of battery failing 1% 11%
Price of a battery per unit ? S$20,000
Due to the critical nature of the medical devices in which it is used, the cost of a battery
failing to the buyer has been arrived as S$1,00,000. Both batteries Bataid and Bat 1 can
be used for an average of 8,000 hours.
Calculate Value Differential of using Bataid.

A S$20,000 B S$2,000 C S$23,000 D S$22,000

Question 29: NZ Mart is a retail chain. Competition is stiff and revolve around the price
among the market player in retain chain segment. NZ Mart adopted the practice of pricing
some its products below cost, with an intention to destroying the competitor. Such pricing
practice/ strategy is referred to as -

A Loss leader pricing B Price discrimination

C Predatory pricing D Penetration Pricing

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Case Scenario 1

A company makes a single product with the following details:

Particulars Current Situation Proposed Situation
Selling Price per unit (₹) 10 10
Direct Cost per unit (₹) 5 5
Present number of setups per production 40 ?
period, (Before each production run, setup is
done)
Cost per set up (₹) 400 270
Production units per run 1000 2000
Engineering hours for production period 600 460
Cost per engineering hour (₹) 10 10

The company has begun Activity Based Costing of fixed costs and has presently identified
two cost drivers, viz. production runs and engineering hours. The total current fixed costs
are ₹97,000. After the above ABC analysis on production runs and engineering runs, 75,000
of the remaining fixed costs are yet to be analysed. There are changes as proposed above for
the next production period for the same volume of output.
Question 30: What is the break-even point in the proposed scenario?

A 16,900 units B 16,000 units C 17,200 units D 17,000 units

Question 31: What do you infer from the above case scenario?
i. Activity Based Costing showed that while costs may be fixed with respect to volume,
they may not be fixed with respect to other cost drivers.
ii. Analysing cost using cost drivers can open up opportunities to save costs
iii. It might be advisable to analyse the balance ₹75,000 fixed cost as well using Activity
Based Costing
A lower break even point after proposed changes increases the chances of being profitable

A i and ii B i, ii and iv C i, ii and iii D i, ii, iii and iv

Question 32: What is the break-even point in the current scenario?

A 19,200 units B 19,320 units C 19,400 units D 19,420 units

Question 33: Based on the calculation in (i) above, what is the total set up cost?

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A ₹5,400 B ₹4,860 C ₹4,680 D ₹5,940

Question 34: Given the information above, compute the number of setups (which will also
be the number of production runs) after the proposed change.

A 20 production runs B 18 production runs

C 24 production runs D 22 production runs

Question 35: The break-even point in the proposed scenario will be achieved in _____
production run.

A 8th B 9th C 10th D 11th

Question 36: Given the above case scenario, if the management implements that proposed
change in production, which among these will be a concern that the management needs to
pay attention to?

A Set up time for production runs reduces due to the proposed change in production

B Doubling the batch size can lead to the risk of machine downtime and more repairs and
maintenance

C Break even point has reduced due to the proposed change in production

D Engineering hours required for production run reduces due to proposed change in
production

Case Scenario 2 (ICAI Model Test Paper)

Nutty Bites produces many edible snacke that are very popular especially among children,
Peanuts, Peanut oil are essential ingredients nts in many of its products. They are currently
facing this ethical issue: Medical studies have indicated peanut allergic reactions are on the
rise. The prevalence is more profound among children. Reactions can range frorn hives around
the mouth to potentially life-threatening reactions when exposed even to the slightest trace
of peanuts. There is growing media campaign to force companies like Nutty Bites to make
disclosure about the presence of peanut on its package labelling.
Nutty Bites is a mid-size company that has a growing market. Risk to peanut exposure can
come not just from the presence of peanuts in its products. Some of its bought-in ingredients

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(raw material input) are cooked in peanut oil. There are risks of "cross-contamination"
amongst products. Let us say, an equipment has been used produce cookies that has peanuts.
Next, the equipment is used, without being cleaned, to produce chips that does not have
peanuts as an ingredient. Some portion of the peanuts / peanut oil could contaminate that
specific batch of chips produced. Since labels of chips would not mention "peanuts" as an
ingredient, it poses a potential risk of causing allergic reaction to a customer unaware of this
contamination. Management of Nutty Bites has called for a meeting to discuss this issue. "The
issue need not be addressed at all. After-all Nutty Bites is doing nothing against the law" is
the opinion of many members on the board of the company.

Question 37: Which of the following scenarios has a less chance of happening if Nutty
Bites does not take any action?

On consuming the product, if the consumer faces a medical issue that gets traced back
A to the product manufactured by Nutty Bites, it could result in bad publicity that could
damage its brand value

B It can increase the risk of potential legal action for tort or committing a civil wrong

C Operating in an ethical environment can increase employee morale and well being

D Profitability from sale of the products for the current month (short run) will be
impacted

Question 38: Would you agree with the popular opinion with the management of Nutty
Bites that "The issue need not be addressed at all. After-all Nutty Bites is doing nothing
against the law"?

A Yes, the health and safety of consumers cannot be the responsibility of Nutty Bites.
Hence, the issue need not be addressed at all.

No, food safety is a fiduciary duty that Nutty Bites owes to the society. Corporate
B Social Responsibility (CSR) is the duty an organization has towards a wider community.
Hence, Nutty Bites has to take steps to address the problem.

C Yes, Nutty Bites is doing nothing against the law. Hence the issue need not be
addressed at all.

D Yes, Nutty Bites need not take any action as there is no lawsuit filed against the
company from the customers.

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Question 39: Which is not a non-financial consideration while considering any potential
responses to address the health and safety issue?

A Disclosure about the presence of peanut on its package labelling

B Machine sanitization to remove traces of peanut oil

C Increase in selling price of products to recoup the cost of making proposed changes

D Audit of upstream supply chain to get information of which bought in ingredients (raw
material input) are cooked in peanut oil

Case Scenario 3

Given data about Price (P) and quantity demanded (Q) given the following sales and demand
data –
Selling Price per unit (P) ₹100 ₹90
Number of units sold (Q) 500 480
Question 40: Based on your calculation in (iii) above, at what selling price (P) is the profit
maximum.

A ₹220 per unit B ₹240 per unit C ₹230 per unit D ₹250 per unit

Question 41: What is the volume of sales / production (Q) when it is given that profit is
maximum when marginal cost is ₹150 per unit?

A 210 units B 200 units C 190 units D 220 units

Question 42: When profit is maximum, as per the pricing theory Marginal Cost = Marginal
Revenue = in this case 150 per unit.
From (ii) MR = 350 - Q. Therefore, 150 = 350 Q. Therefore Q = 200 units. This is the
sales volume at which profit is maximum.
Find the linear relationship between P and Q.

A P=350-0.50 B Q=350-0.5P

C P=350+0.5Q D 0=350-0.5P

Question 43: The condition for profit maximisation is -

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A MC Curve cuts MR Curve from below B MC Curve cuts MR Curve from above

C Slope of MC > Slope of MR D Slope of MC = Slope of MR

Question 44: Find the equation for the Marginal Revenue based on your calculations above.

A MR=350-Q B MR=350-P C MR=350+0 D MR=350-P

Case Scenario 4

Rabi Ltd. Manufactures its product from Divisions X and Y Rabi Ltd. is considering the
discontinuance of Division Y since it is incurring a net loss of ₹2,00,000. The production at
Division X is going to remain unchanged. The following information is given

Particulars Divisions X Division Y Total

Sales (Maximum achievable) (₹) 50,00,000 7,00,000 57,00,000
Less: Variable cost (₹) 36,00,000 4,00,000 40,00,000

Contribution (1) 14,00,000 3,00,000 17,00,000

Less: Specific avoidable fixed cost (₹)

Divisional Income (₹) 12,00,000

-2,00,000
10,00,000
The rates of variable costs are 90% of the normal rates due to the current volume of
operation. There is adequate market demand.
For any lower volume of operation, the rates would go back to normal rates.
Specific avoidable fixed cost relates to the rental and property tax cost of the premises of
Division Y, which operates from a prime business area.
Facilities released by discontinuing Division Y cannot be used for any other purpose.

Question 45: Rabi Ltd. is compelled to reconsider its decision of closing down Division Y
because that could impact its brand image and pose challenges for re-establishment of the
market for the product.
What type of consideration is being given weight to by the management by looking into
these factors?

A Relevant cost consideration B Financial consideration

C Ethical consideration D Non-financial consideration

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Question 46: Which of the following is not a limitation of non-financial consideration?.

A Subjective measurement that could be subject to bias and interpretation

B Improper measures will lead the companies to draw attention on wrong objectives

C Focuses on factors that can aid sustainability of the organization in the long run

D Possibility of error due to lack of statistical reliability

Question 47: If Division Y is discontinued, what will the increase in Variable cost be for
Rabi Ltd?

A Rs. 3,60,000 B Rs. 4,00,000 C Rs. 4,44,444 D Rs. 4,20,000

Question 48: If Division Y is discontinued, what will be the total savings and total increase
in cost for Rabi Ltd on account of this decision?

A Savings ₹5,00,000; Increase in cost ₹7,00,000; net loss ₹2,00,000

B Savings ₹5,00,000; Increase in cost 4,00,000; net benefit ₹1,00,000

C Savings ₹7,00,000; Increase in cost ₹7,00,000; no loss or benefit

D Savings ₹7,00,000; Increase in cost 4,00,000; net benefit ₹3,00,000

Case Scenario 5

KG Airlines is the second largest airline in India. Post the Covid 19 pandemic, the airline
industry is slowly reviving its pre-pandemic levels of operations. Business is expected to revive
and grow in the next few years. Profit margins of all players in the aviation industry are under
constant pressure. This is due to adverse global economic factors and overall inflationary
conditions within the domestic market. KG airlines like all other players in the industry is
preparing for recovery of business and wishes to maintain if not grow its market share.
"Just like the skies we operate in; customers' expectations are limitless. At the same time, a
limit certainly exists for the price that the customer is willing to pay for a flight as also to
the costs we can incur in order to remain viable" bemoaned the Chief Executive Officer (CEO)
of the company. This key challenge of balancing customer satisfaction and cost reduction

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efforts was discussed at length by the senior management team at the company's head
quarters in Mumbai.

The Regional Marketing Head emphasised that customer experience should not be
compromised due to cost reduction measures. Annoyed customers are very likely to switch to
rival airlines and hence market share can be impacted.
The Chief Financial Officer (CFO) is a capable experienced Chartered Accountant who has
good insights about the operations in an airline industry. She says "We have many costs such
as aviation turbine fuel, government taxes etc. which are not within our control. Let us,
therefore, target those costs that are variable and hence controllable by us. Charging
customers for every service can many times annoy and affect their flight experience.
Therefore, let us reward them instead while cutting down costs!" She further detailed how
this can be done:
It was found that passengers arrive at the airport for check in typically or 2 hours before
the flight, although the airline recommends that they come 3 hours before in order to avoid
congestion. Due to the constant last-minute arrivals, the airline has a higher staffing
requirement at the check in counter, flight boarding staff and other ground crew. If the
arrivals are streamlined by making the passengers arrive earlier, the company can save
₹2,00,00,000 per annum due to lower staffing requirements. This benefit is considering the
savings across all airports that KG airlines operates in. To incentivise passengers to arrive 3
hours early, the airline can propose to add 50-mile points to their frequent flyer reward
program. The reward points can be encashed to get exciting, customized gifts. Approximately
10,000 passengers are expected to avail of this incentive each year, with each mile point
costing the airline Rs.20 per mile point.
Additional mile points can help maintain a loyal frequent flyer base. Another major benefit is
that the airline can avoid delays in flight take off due to late passenger arrival. Hence, the
benefits of this program are far reaching.

Question 49: Growth in aviation sector has led to congestion in airports across the
country. Due to which parking space available for planes at the airport hanger is limited.
Due to high demand, the parking fees is also increasing at a rapid rate. Which tool of
strategic cost management will you apply to minimise the time a plane is parked at the
hanger?

A Kaizen improvement B Quality management

C Theory of constraints D Preventive maintenance

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Question 50: As per the Kano model, match the factors to their corresponding attributes
Factor Attribute
i. Initiatives taken to ensure flight safety a. Reverse attribute
ii. Initiative to incentivise early check in of b. Indifferent attribute
passengers
iii. Delay in flight take-off and landing c. Threshold attribute
iv. Airport fees paid incurred by the airline d. Excitement or delight attribute

A i-a, ii- b, iii- c and iv- d B i- c, ii- a, iii- b and iv-d

C i- c, ii- d, iii- a and iv-b D i- d, ii- a, iii- c and iv-b

Question 51: If KG wants to analyse its revenue generation based on various segments,
which analysis should it undertake?

A Value chain analysis B Customer profitability analysis

C Supply chain analysis D Balanced scorecard

Question 52: Calculate the net benefit to KG airlines by incentivising passengers to arrive
early at the airport?

A ₹90,00,000 B ₹1,00,00,000 C ₹1,10,00,000 D ₹80,00,000

Question 53: During the meeting, the management discussed key information
requirements and needs of various stakeholders. Using Mendelow's Matrix, match the
stakeholders to the power and interest they wield over KG airlines.
Stakeholder Power and interest
i. Air traffic control a. Key Players - High power high interest
ii. Suppliers of aviation fuel b. Influential - High power low interest
iii. Contract employees c. Marginal - Low power low interest
iv. Environment activists d. Affected - Low power high interest

A i- b, ii- a, iii- c and iv- d B i-a, ii- b, iii- c and iv-d

C i- c, ii- d, iii-a and iv-b D i-b, ii-a, iii- d and iv- c

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Case Scenario 6

Payfast Limited offers an application-based service to make payments by phone. It allows

linking of phone numbers with bank and allow bank to bank transfer through mobile phone.
It was the 1st company in the country to provide such facility. The customers could not believe
that money transfer process could be made so much simpler and the company witnessed
exponential growth in very few days. The services level was immaculate and no charges were
levied on the customers. Seeing the growth of Payfast, many other companies joined the
industry and started providing this service. Now, Payfast was required to provide other
innovative offerings to the customers to maintain its leadership position.
Further, the user count was increasing and so Payfast was spending more to maintain security
of the user data. Security breach, if any, could result into loss of millions to its users.
Similarly, all its competitors were also spending a significant amount on the security of user
data.
In order to incentivize customers, Payfast starting giving cash backs to its customers on
every transfer. This was unheard of. Getting money for making transfer was unheard and its
competitors also could not fathom it.
To compete with Payfast, its competitors started adding new features on their applications
like movie booking, cab booking, etc. But this was not well received by customers as customers
used different apps for such transactions which had much better user interface and features.
Slowly, the competitors removed those features and went back to their original product.
To improve its brand presence, Payfast hired an international brand designed and designed a
new logo for Payfast.

Question 54: Adding different features by the competitors can be termed as below?

A Indifferent B Performance Attributes

C Threshold D Reversal

Question 55: Should Kano spend huge amount on logo designing to improve customer
satisfaction?

A Yes, as customers love great logo B No, as customers would be indifferent

C Yes, as competitors had better logo D

No, as companies change logo
frequently
Question 56: Which would be most appropriate description for Payfast's offering
improvement for user data? of security

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A Delighter B Performance attribute

C Indifferent D Reverse

Question 57: Is giving cashbacks by Payfast a justified cost?

A Yes, as customers would be delighted B No, as customers would be indifferent

C No, as it would affect profitability D No, as competitors would eventually

catch up

Question 58: How would you best describe the offering by Payfast of application to make
payments through mobile phone?

A Performance attribute B Delighter

C Indifferent D Delighter when introduced, currently

threshold attribute

ICAI MODULE QUESTIONS

Question 59: Match the item of list I with that of list II and suggest correct code-
List I - Pricing Strategy List II – Explanations

A. Customary Pricing 1. Ending price with 99

B. Skimming 2. Pricing a product based on perceived expectation of

customers
C. Penetration Pricing 3. Setting a high price which gradually reduces as competitors
enter the market
D. Psychological Pricing 4. Setting a low price for a new product during its initial
offering

A A - 4, B - 1, C - 2, D - 3 B A - 3, B - 4, C - 1, D - 2

C A - 2, B - 3, C - 4, D - 1 D A - 1, B - 2, C - 3, D – 4

Question 60: In a product mix decision, which is the most important factor to consider in
order to try to maximise profit?

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A Contribution per unit of a scarce B Contribution per unit of the product

resource used to make the product

C Profit per unit of a scarce resource D Profit per unit of the product
used to make the product

Question 61: DM Mart is a retail chain. Competition is stiff and revolve around the price
among the market player in retain chain segment. DM Mart adopted the practice of pricing
some its products below cost, with an intention to destroying the competitor. Such pricing
practice/strategy is referred to as

A Loss leader pricing B Predatory pricing

C Price discrimination D Penetration Pricing

Question 62: Cafe coffee hub offer a feature of writing name of customer on the
takeaway glass down under the logo of CCH, the size of logo of CCH on glass of coffee is
which type of attribute (referring to Kano Model)?

A Reversal B Delighter

C Performance D Indifferent

Question 63: What is the disadvantage of conventional Cost Volume Profit (CVP) analysis?

A Conventional CVP analysis cannot be used in finding out expected production volume
level to earn a certain profit level

B Conventional CVP analysis cannot be used to determine the ideal selling price to set for
the product to earn a target profit

Conventional CVP analysis classifies cost behaviour as fixed and variable with respect
C to volume alone. Many non-volume driven costs, having cost drivers other than volume,
get classified under a single fixed cost overhead pool

D Conventional CVP analysis cannot be used for all types of business

Question 64: How will an exciting or delight attribute help with pricing a product?
- Provides a justification to charge a premium price for that feature
- Build customer loyalty for repeat sales

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- Helps to grow market share and become a market leader

- Provides the basis for product differentiation

A ii and iv B i, iii and iv

C i, ii and iii D All of the above

Question 65: Kano Model of product development and customer satisfaction is used for
prioritizing the most important features in a product roadmap. Which of the following is
not true about the utility of the Kano Model?

A Order of priority of product features that cater to customer needs and satisfaction
as determined by Kano Model are permanent

B The Kano model can prevent wasted time and resources used to develop non-priority
features in a product

C The Kano model helps to prioritize features that can amplify customer satisfaction

D Kano model helps to speed up decision making based on researched data

Question 66: Which of the following is not a criticism of using profits as a single measure
of performance evaluation of managers?

A Profits can be manipulated if there is collusion among employees

B Profits provide a constrained view of performance measurement

C Profits alone as a measure of performance evaluation can lead to manager focusing on

short term profits rather than long term sustainable strategy

D Profits figures can be objectively measured and defended by the managers

Question 67: Identify the attribute that can be classified as indifference attribute to a
retail customer of a bank under the Kano Model

A Reduction of limit of a credit card issued by a bank

B Ability to receive One Time Password (OTP) reliably on the mobile to execute net bank
transactions

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C Action within an hour on service requests placed online using net banking services of
the bank

D Cost of embossing the credit card issued by the bank

Question 68: When would you not price a product below marginal cost?

A Product is of perishable nature with a very short shelf time remaining

B Product manufactured based on customized orders

C Popularize a product in a new market

D Reduction in price of product can boost the sales of related products that have a
larger profit margin

Question 69: The selling price that will maximize the profit for this product will be:

A Rs.60,000 per unit B Rs.65,000 per unit

C Rs.70,000 per unit D Rs.75,000 per unit

Question 70: In a product mix decision, which is the most important factor to consider
in order to try to maximise profit?

A Profit per unit of the product B Contribution per unit of the product

C Profit per unit of a scarce resource D Contribution per unit of a scarce

used to make the product resource used to make the product

Question 71: Fast Heal Tech Ltd. is a leading IT security solutions and ISO 9001
certified company. The solutions are well integrated systems that simplify IT security
management across the length and depth of devices and on multiple platforms. Company
has recently developed an Antivirus Software and company expects to have life cycle of
less than one year. It was decided that it would be appropriate to adopt a market skimming
pricing policy for the launch of the product. This Software is currently in the Introduction
stage of its life cycle and is generating significant unit profits.
Out of followings which are the necessary strategies when the Software moves from the
Introduction stage to Growth stage of its life cycle -
- Improving quality and adding new features

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- Lowering price to attract price-sensitive buyers

- Changing marketing strategy to increase demand
- Sourcing new market segments/ distribution channels
- Entering into another niche area could increase profits

A iii, iv, and v B i, ii, iii, and iv

C ii, iii, iv, and v D i, ii, iii, iv, and v

1: D
The correct answer is (i), (ii), (iii) and (iv).
Direct labour is considered fixed instead of variable. JIT environment the labour force is
multi skilled and are capable of handling different demand levels. Under the pull system of
supply chain, production begins only when a customer places the order. Hence, direct labour
cost is not volume driven. While there is no production in the work cells, the labour is
assigned to some other tasks on the shop floor, which is possible because they are multi-
skilled.
Direct material cost on the other hand is driven by volume of production as production
happens only when an order is received.
Due to the nature of the JIT material procurement system, there is minimum if not nil
waste or scrap. Since material procurement is not in bulk, quantity discounts are generally
not there.
The purpose of a just in time production system is to decrease the size of production runs
while increasing the lots processed in a period.
2: A
Description: Where there is a shortage of direct labour hours, the companys manufacturing
plan to include features prioritized based on customer satisfaction. Threshold attribute is
a must have feature, the absence of which will cause customer dissatisfaction. Hence, it
should be given highest priority as it is a must have in the product. Performance attribute
is a feature where the more the availability of the feature, better the customer
satisfaction. It is next to threshold attribute in the priority list. Excitement or Delight
attribute is an unexpected feature provides satisfaction when they are met but do not
cause dissatisfaction when they are not met. Reverse Feature, if present must be removed
from the product, rather than include it in the product. This feature when present causes
dissatisfaction. Indifference Quality is a lower priority as it does not affect customer

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satisfaction. Given this, in option where Manufacture to include feature that is first a
Threshold attribute, second Excitement or Delight attribute and lastly Indifference
qualities is in appropriate order of priority.
3: D
Description: The cost of embossing (emboss means to carve with a design) the credit card
issued by the bank is not linked to customer satisfaction of the retail customer. Hence, it
is an indifference attribute/ quality. The other features affect customer satisfaction
directly.
4: A
Description:
Customized Product - Cost Based Pricing
Generally, when a product is manufactured based on specific customer requirements, the
total cost can be easily traced. Adding the required mark up, cost based pricing becomes a
popular pricing method for customized product.
Perfect Competition - Going Rate Pricing
Firms are price takers in a perfect competition. Hence, they will keep the price at the
average industry level irrespective of their cost of production or demand.
Defence Contract Work/ Infrastructure Projects - Sealed Bid Pricing
In these scenarios, normally many firms compete for the project. They submit their bids
confidentially; pricing is based on the bidding firm's perception of what its rivals would be
charging for the same work. It does not depend only on its cost of production or demand.
Pharma Companies in an Oligopolistic Market Collusion Pricing
With few firms in the business, normally the price is set based on the agreement with other
firms. This is done so that there is no direct competition among them at the same time the
price is set earn sufficient profitability. Collusion pricing also deters new entrants.
5: D
Description: Discount was approved by O is discounts for distributors.
6: B
Description: The correct answer is al 65,000 per unit.
As per the profit maximization model,
Price =a - bQ and Marginal Revenue = a - 2bQ
where a is the selling price at which demand is nil, b is the slope of the line and Q is the
quantity demanded.
Here a = Rs.80,000 per unit, b = (change in price / change in units) = (10,000 / 2) = 5,000
and Q is the quantity demanded.
Price = 80,000 - 5,000Q
Marginal revenue= 80,000-2 (50,000) x Q = 80,000-10,000Q
Marginal cost = Rs.50,000 per unit.
Profit is maximum where Marginal Revenue = Marginal Cost.
80,000-10,000Q = 50,000

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10,000 Q = 30,000. Therefore Q = 3 units

Therefore, selling price at which profit will be maximum = Price = a - bQ = 80,000 - 5,000(3)
= 65,000 per unit.
7: A
Description:
Price per piece to be quoted
Avg. / unit (4 units)
Variable Cost 2,000
Labour 810
Target Contribution 1,500
Price to be Quoted 4,310
8: D
Description: The correct answer is high proportion of expenditure (product cost) to the
customer income. Where the expenditure on account of the purchasing the product is high
in proportion to the customer income, the customer will be more sensitive towards the price
of a product.
9: C
Description: Oligopoly is the market in which the firm consider not just the demand for the
product but also predict the resultant reaction of its rivals or competitors on any decision
it takes.
10: 1A
Description: Distributors Discount- Create different prices to different customers on the
basis of marketing functions performed by them. Also known as functional discount.
Quantity Discount- Practicable where the commodities are homogeneous or identical in
nature, or where they may be measured in terms of truckloads or measured in physical
units. Cash Discount- Useful in trades where credit risk is high. Reward for prompt
payment. Trade in Allowance/ Promotional Allowance- Channel partners are encouraged to
promote companys products (incentive to push a product) to customer. For example,
retailers may be allowed advertising allowance that encourage them to advertise the
companys products in the local newspapers. The retailer gains by getting some allowance
towards advertising expense, while the manufacturer gets the advantage of lower
advertising costs that retailers typically get while advertising in papers.
11: 1D
Description: $5 x 550 ÷ 110 = $25
12: D
Description: It is not true that cost based pricing requires market research to understand
competitor's strategy. Cost based pricing is based purely on the cost the company incurs
and the mark up or profit margin it requires. It does not consider competitors' strategy,
market demand, customers' perception, market conditions etc.
13: C

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Description: Going rate pricing is completion-based pricing method. Going Rate Pricing is a
competitive pricing method under which a firm tries to keep its price at the average level
charged by the industry. The use of such a practice of pricing is especially useful where it
is difficult to measure costs.
14: D
Description: Price skimming is charging customers a premium price for a new product when
it is initially launched in the market. This does not necessarily coax a buyer to make an early
purchase. The terms of promotional pricing are liberal. Longer payment terms give the
buyer more credit time to repay, special event pricing aims to attract customers at events
using attractive prices, loss leader pricing is lowering the price of well-known brands to
stimulate sales growth of other products sold in the shop by making customers visit the
location.
15: B
Description: Features your product needs to be competitive - Threshold / Basic attributes.
More investment in these features, more satisfaction the customer gets - Performance
attributes. Features provide satisfaction when met but do not provide dissatisfaction when
not met Excitement / Delight attributes. Features that have no effect on customer
satisfaction - Indifference qualities. Features if present cause customer dissatisfaction -
Reverse qualities.
16: B
Description: Relevant Cost of Producing One Unit of the Finished Product
Rs.
Cost of Material 'M' (Realisable Value) 80
Cost of Labour (Being Sunk Cost) 0
Out-of-Pocket Expenses 30
110
Allocated Overhead is not relevant for the decision. The customer should be charged Rs.110
per unit.
17: A
Description: It should first invest in Feature 1 and any surplus is invested in Feature 2.
Feature 1 has a threshold attribute, when it is present in the product it is taken for granted
but when absent it causes customer dissatisfaction. This attribute deals with the very basic
product features that must be present in order to be competitive. Comparatively, Feature
2 has a performance attribute. The more the investment in this feature the more the
customer satisfaction. While it can influence the decision of customers who seek certain
features in the product, is not a must have feature unlike Feature 1 which is a very basic
attribute. Hence, given a funding constraint, the company should first invest in Feature 1
and any surplus is invested in Feature 2. The objective of Kano Model is to provide the
company a framework to prioritize these features based on customer satisfaction.
Investment cannot be split equally in both features given that feature 1 is a must have and

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has to be part of the product feature. Not investing in Feature 1 will cause customer
dissatisfaction and hence the company should avoid this decision.
18: D
Description: The objective value determined here is from whose viewpoint
• The medical equipment manufacturer
• PowerOn
• Final customer, the hospitals
The correct answer is Rs.22,000 per unit of Bat aid. It is calculated as below
True economic value for a consumer is calculated taking two differentials into
consideration:
TEV = Cost of the Next Best Alternative + Value of Performance Differential
Cost of the next best alternative is the cost of a comparable product offered by some
other company. Value of performance differential is the value of additional features
provided by the seller of a product.
Particulars Amount (Rs.)
1. Difference in operating cost per battery 8,000
(higher expense incurred by buyer)
Bataid = Rs.2 per hour
Bat 1 = Re.1 per hour
For 8,000 hours = Rs.8,000 x (Rs.2 - Re.1)
2. Savings to buyer due to more stable performance of battery 10,000
Cost of battery failing = 1,00,000
Difference in probability of battery failure to buyer (1% vs
11%) = 10%
Lower cost of failure to buyer = 10% x 1,00,000

3. Value Differential of using Bataid 2,000

(Step 2 – Step 1)
4. Price of per unit Bat 1 battery (cost of next best alternative) 20,000
5. True economic value of per unit Bataid 22,000
True economic value/ Objective value determined here is from the point of view of
PowerOn, the battery manufacturer. Objective value is a measure of benefits that a
product is intended to deliver to the consumers relative to the other products without
giving any regard whether the consumer can recognize these benefits or not.
19: A
Description: P=a-bQ
Where 'P' is the selling price per unit, a is the price at which demand is zero, Q is the
quantity demanded.

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-b = -0.5 (change in price / change in quantity demanded = (Rs. 100-190) / (500- 480) units
= -0.5)
Therefore, the equation is P = a - 0.5Q.
Substitute P and Q in the above equation to find 'a'
100 = a (0.5×500). Therefore, a = 350 units.
Therefore, the linear relationship between Price (P) and quantity demanded (Q) can be
written as P = 350-0.5Q.
20: B
Description: The correct answer is (B), the use of substandard material is relevant as it
affects customer service quality and hence is a non-financial consideration. Even though it
does not affect budget adversely, it does have an impact in the operations of the business.
The customers perspective will be negatively impacted which can affect funding for the
organization. Hence it does have long term consequences for the organization.
21: D
Description: Fitness Centre - People processing service, the customer has to be physically
present for the service to be rendered. Here, the customer has to attend the gym to use
the fitness centre services. Warehousing - Product/ possession processing service,
customer need not be present. However, the service is being worked on a tangible object.
Here, the goods being stored in the warehouse (tangible object in the possession of the
customer) is now being stored in the warehouse (service being provided on the object).
Advertising - Mental stimulus processing service. These services influence the customers
behaviour, perception etc. There is no need for physical presence of the customer nor is
there any need for a tangible product of the customer to be worked on. The customer only
has to experience it, this service will be unique to each customer as each of their perception
and behaviour is different. Hence, the delivery of the service will be different for
different people. Knowledge Processing Offices (KPO) - Information processing service.
Service occurs when information is being processed. The work of the client (information)
is being processed and service is being rendered. This could relate to accounting work, legal
work, taxation etc.
22: A
Description: Product C should be processed further because each unit of Product C sold
contributes $50 per unit towards recovery of joint cost.
Joint cost upto split off point are irrelevant since they have already been incurred and are
sunk cost. It is not relevant to whether the product has to be processed further or not.
Hence, joint cost of $80 per unit incurred upto the point of separation is irrelevant. Only
the additional cost incurred on processing after separation has to be considered.
Selling price of Product C per unit $150
Less: Additional variable cost after separation $80
per unit
Less: Additional fixed cost after separation $20
per unit

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Contribution towards recovery of joint costs $50

per unit
23: A
Relevant items to be considered for decision making are -
Statement ii- Savings of salary cost of 30% of ground staff who have been let go.
Statement iii- Retrenchment compensation of 2 months' salary paid to the ground staff
who have been let go.
Statement iv- Special maintenance cost to ensure that engines of grounded fleet remain in
working condition.
The above three items are savings or expense that relate to the future and will be earned/
incurred only if the decision is taken to temporarily shut down operations. If the decision
is taken to continue operations as normal, these savings and expenses will not happen, hence
these are differential in nature, thereby relevant to the decision being taken.
Salary paid to the pilots and airport hanger fees will be incurred irrespective of the
decision to temporarily shut down or not. Hence, they are not relevant to the decision being
made.
24: A
Description:
Opportunity Cost of Labour - The G₂ labour has zero opportunity cost as there is no other
use for the time already paid for and is available. However, XL Polymers needs to pay an
additional amount for G₁ labour. This amount can be save if the special job were not there.
G₁ labour:
Hours Required 250
Hours Available 150
Extra Hours Needed 100
Cost per hour (630/42hrs) Rs.15
Opportunity Cost Rs.1,500
Thus, the 'Opportunity Cost of Labour' for completing the special job is Rs.1,500.
Opportunity Cost of Material - XL Polymers has no alternative use for the R₁, they must
dispose of it at a cost of Rs.1,250. Thus, XL Polymers actually saves Rs.1,250 by using the
materials for the AT Industries' special job. Consequently, the 'Opportunity Cost of
Material' is Rs.1,250 (i.e., the opportunity cost of this resource is negative).
The minimum price is the price at which XL Polymers just recovers its 'Opportunity Cost'.
XL Polymers's 'Total Opportunity Cost' is Rs.250 (Rs.1,500 - Rs.1,250). Accordingly,
minimum Price for the Special Job is Rs.250.
25: A
Description: Statement of Total Contribution
Sales Price Variable Contribution Sales Volume Total
p.u. (Rs.) Cost p.u. (Rs.) p.u. (Rs.) unit Contribution
(Rs.)

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27.50 17.00 10.50 7,500 78,750

27.00 17.00 10.00 8,000 80,000
26.50 17.00 9.50 8,500 80,750
26.00 17.00 9.00 9,000 81,000
25.50 17.00 8.50 9,500 80,750
25.00 17.00 8.00 10,000 80,000
24.50 17.00 7.50 10,500 78,750
24.00 17.00 7.00 11,000 77,000
From the above statement it is quite apparent that the contribution would be maximum at
a sale price of Rs.26 per unit and sales demand of 9,000 units.
26: D
Description: The size of logo on the takeaway cup of coffee is not really making any
difference to value and utility of product or even value perceived by customer hence it is
indifferent attribute. Indifferent qualities are neither good nor bad and have no effect,
positive or negative, on customer satisfaction. To illustrate - look of emoticons in messaging
apps in phone, placing of logo on phone, size thereof.
27: C
Description: Most organisations focus on Kanos performance attributes on the basis that
the higher the performance attributes, the higher the customers willingness to pay.
28: B
Description: The correct answer is S$2,000 per unit of Bat aid. It is calculated as below
BM
Particulars Amount S$ Difference in Operating Cost per battery (higher expense incurred
by buyer) Bataid = S$2 per hour Bat 1 = S$1 per hour For 8,000 hours = 8,000 AV (S$2-
S$1) 8,000
Savings to buyer due to more stable performance of battery Cost of battery failing =
S$1,00,000 Difference in probability of battery failure (1% vs 11%) = 10% Lower cost of
failure to buyer = 10% A S$1,00,000 10,000 Value Differential of using Bataid (Step 2 a
Step 1) 2,000
29: C
Description: Predatory pricing (loss leading) is the practice of selling a product or service
at a very low price, intending to drive competitors out of the market or create barriers to
entry for potential new competitors.
30: D
Description: The correct answer is 17,000 units.
Total fixed cost = Rs.85,000 and contribution per unit = Rs.5 per unit (selling price Rs.10 -
direct cost Rs.5).
Hence Break-even point = fixed cost / contribution per unit = 85,000 / 5 = 17,000 units.
31: D
Description: The correct answer is all the statements are true.

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32: C
Description:
The correct answer is 19,400 units.
Total fixed cost = Rs.97,000 and contribution per unit = Rs.5 per unit (selling price Rs.10 -
direct cost Rs.5).
Hence, Break-even point = fixed cost / contribution per unit = 97,000 / 5 = 19,400 units.
33: A
Description: The correct answer is Rs.5,400. Total set up costs = 20 set ups x Rs.270 per
set up.
34: A
Description: The correct answer is 20 production runs.
Total number of units produced currently = Production units per run x Number of set ups
(which is also the number of production runs) = 1,000 units x 40 set ups = 40,000 units.
Batch size after proposed changes = 2,000 units. Therefore, the number of production runs
= 40,000 units / 2,000 units = 20 production runs (batches / set ups).
35: B
Description: The break-even point will be achieved in 9th production run (BEP 17,000 units
/ 2,000 units per batch) = 8.5 batch which is basically the 9th batch being produced.
36: B
Description: The correct answer is doubling the batch size implies that the machine runs
for longer. The management has to consider whether this could lead to machine break down.
In the long run this will lead to machine downtime and therefore more repairs and
maintenance. Batch size is a non-financial factor which has a longer-term implication. Hence,
while the company may be able to earn short term profits, it might not be profitable in the
long term.
37: D
Description: The correct answer is - Profitability from sale of the products for the current
month (short run) will be impacted. In the very immediate future, as mentioned the span of
current month, it is unlikely that the profit will be impacted. However, in the long-term
health and safety concerns about the product can lead to potential financial penalties, legal
issues that can impact the brand image.
38: B
Description: The correct answer is No, food safety is a fiduciary duty that Nutty Bites
owes to the society. Corporate Social Responsibility (CSR) is the duty an organization has
towards a wider community. Hence, Nutty Bites has to take steps to address the problem.
39: C
Description: The correct answer is - Increase in selling price of products to recoup the
cost of making proposed changes is a financial consideration. The rest are non-financial
considerations.
40: D
Description: Profit will be maximum when Selling Price (P) is ₹250 per unit.

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From (iii) it is found that when sales volume is 200 units (Q) the profit is maximum
because it is at this point that MR = MC.
From (i) the linear equation between P and Q is P = 350-0.5Q.
Substituting Q to be 250 units 0.5(200) = 350 - 100 = 250
P = 350
Therefore, it can be concluded that when Selling Price (P) is 250, the sales volume (Q) is
200 units and the profit earned at this level will be maximum.
41: B
42: A
Description: Pa-bQ
Where 'P' is the selling price per unit, a is the price at which demand is zero, Q is the
quantity demanded.
-b=-0.5 (change in price / change in quantity demanded = (₹100-₹90) / (500-480) units = -
0.5)
Therefore, the equation is P=a-0.5Q
Substitute P and Q in the above equation to find 'a'
100=a-(0.5\times500) . Therefore, a=350 units.
Therefore, the linear relationship between Price (P) and quantity demanded (Q) can be
written as P=350-0.5Q
43: A
Description: One of the two requirements for a firm to reach stable equilibrium is that its
MC curve cuts the MR curve from below, not from above. The equilibrium created if the
MC curve cuts the MR curve from above won't be stable because greater production could
increase profits.
44: A
Description:
Marginal Revenue = a - 2bQ whereas calculated in (i)a=350 units and b=-0.5
Therefore, the Marginal Revenue equation is MR = 350-2(0.5); MR=350-Q
45: D
Description: The correct answer is non-financial consideration. Information about an
organization, like number of employees, employee morale, customer satisfaction that cannot
be expressed in monetary terms is termed non-financial in nature. Non- financial
information is long term focused and ensures profitability and sustainability in the long
term for an organization thereby evaluating the internal performance of the company.
Brand image and challenges in re-establishing the market for a product are non-financial
aspects that a business must look into taking a balanced view into consideration.
Closure of a branch/ division is not unethical and is driven by business considerations.
Relevant cost by its nature is a financial consideration.
46: C

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Description: The correct answer is non-financial consideration makes an organization focus

on factors that can aid sustainability of the organization in the long run. This will improve
its profitability in the long run and encourages establishing a sustainable business model.
47: B
Description: The correct answer is ₹4,00,000, if Division Y is shut down no variable cost
will not be incurred at the division, it will be incurred only in division X. The current variable
cost is at 90% of normal rates, hence (₹36,00,000 / 90%) = 40,00,000 will be the total
variable cost at full cost basis. Hence, the increase in variable cost will be ₹4,00,000
48: A
Description:
The correct answer is Savings ₹5,00,000 Increase in cost ₹7,00,000 therefore net loss
₹2,00,000.
Particulars Amount (Rs.)
Savings Due to Discontinuance
Specific Fixed Cost 5,00,000
Total ...(A) 5,00,000
Loss/Increase in Cost Due to Discontinuance
Loss of Contribution 3,00,000
Increase in Variable Cost 4,00,000
Total ...(B) 7,00,000
Excess of Loss Over Savings ...(B) - (A) 2,00,000
49: C
Description: The correct answer is theory of constraints. Here, the constraint/ bottleneck
is the parking space available in the airports. Using theory of constraints, KG airlines can
plan its flight plan and route connections such that either (i) it can choose a time for arrival
or departure when parking is reasonably available else (ii) it can plan it route connections
such that the need for parking is reduced.
50: C
Description: The correct answer is i- c, ii- d, iii- a and iv-b
Initiatives taken to ensure flight safety Threshold attribute, a must have attribute.
Initiative to incentivise early check in of passengers - Excitement or delight attribute, a
unique and unexpected reward that delights passengers.
Delay in flight take-off and landing - Reverse attribute, if present causes dissatisfaction,
delays cause dissatisfaction. Customers always expect flights to be on time.
Airport fees paid incurred by the airline Indifferent attribute since it is irrelevant to
customer satisfaction.
51: B
Description: The correct answer is customer profitability analysis.
52: B
Description: The correct answer is ₹1,00,00,000.

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Each mile costs ₹20, which means each passenger credited with 50-mile points for coming
early, will cost ₹1,000. For 10,000 passengers the cost would be ₹1,00,00,000. Overall
savings to the company due to this initiative is ₹2,00,00,000. Therefore, the net benefit
to KG airlines for incentivising passengers to arrive early at the airport would be
Rs.1,00,00,000 (Savings of ₹2,00,00,000 less cost of Rs.1,00,00,000).
53: D
Description: The correct answer is i- b, ii- a, iii- d and iv- c
Air Traffic Control: Influential - High power low interest.
Suppliers of aviation fuel: Key Players - High power high interest.
Contract employees: Affected - Low power high interest.
Environment activists: Marginal - Low power low interest.
54: D
Description: Reversal, as complexity, has led to customers not liking it.
55: B
Description: No as customer would be indifferent as logo does not add any satisfaction to
customer.
56: B
Description: Performance attribute as non-maintaining security will cause customer
dissatisfaction.
57: A
Description: Yes, as customers would be delighted as this is completely new way and
customer satisfaction will increase.
58: D
Description: Delighter when introduced, currently threshold attribute as currently all
competitors are providing this feature.
59: C
Description: Customary Pricing is value based perception oriented pricing, skimming is
pricing strategy wherein prices are reduced gradually to capture each point of price curve
(those who need the product early on have to pay more), penetration pricing is charging low
price with intent to capture more market share; whereas psychological pricing rest on
triggering psychological effect (known as Bata pricing in India, because Bata bring this
trend to India and price their products say pair of shoes for 999 or 1,499 rather 1,000 or
1,500)
60: A
Description: Product mix decision is short term decisions where bottleneck or limiting
factor is involved. Short term decisions have two characteristics that make them relatively
easier than longer term decisions. Firstly the time value of money can be ignored, secondly
the most of the fixed costs will be incurred anyway so can be ignored as not relevant In
such cases the main approach is usually to consider relevant cash flows, which may simplify
to looking at the impact of the decision on the contribution. Hence contribution per unit of
limiting factor shall be used to make the decisions.

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61: B
Description: Predatory pricing (loss leading) is the practice of selling a product or service
at a very low price, intending to drive competitors out of the market or create barriers to
entry for potential new competitors.
Note - One should not confuse penetration pricing with predatory pricing.
62: D
Description : The size of logo on the takeaway cup of coffee is not really making any
difference to value and utility of product or even value perceived by customer hence it is
indifferent attribute. Indifferent qualities are neither good nor bad and have no effect,
positive or negative, on customer satisfaction. To illustrate - look of emoticons in messaging
apps in phone, placing of logo on phone, size thereof
63: C
Description : The disadvantage of conventional CVP analysis is that it classifies cost
behaviour as fixed and variable with respect to volume alone. Many non-volume driven costs,
having cost drivers other than volume, get classified under a single “fixed cost” overhead
pool. This problem is resolved using Activity Based CVP analysis. CVP analysis can help the
company determine the production level or selling price of a product to earn a target profit.
It can be applied in any type of business.
64: D
Description : A feature that sets the product apart by providing high level of customer
satisfaction will provide a justification for premium pricing, build customer loyalty,
improves market share and is the basis for product differentiation.
65: A
Description : Customer needs and satisfaction from a product are always changing. Hence,
the priority of product features determined using Kano Model will not be permanent. A
must have feature today, can be a reverse feature (that causes dissatisfaction) in future.
Example can be a dial up connection for internet in the early 2000s has changed from a
must have feature to a redundant / reverse feature in today’s world of wi-fi connectivity
66: D
Description : The correct answer is - profits can be objectively measured with lesser room
for subjectivity. These can be used by the managers to defend their decisions.
67: D
Description : The cost of embossing (emboss means to carve with a design) the credit card
issued by the bank is not linked to customer satisfaction of the retail customer. Hence, it
is an indifference attribute/ quality. The other features affect customer satisfaction
directly.
68: B
As per market research, when the selling price of a product is Rs.80,000 per unit there will
be no demand. For every Rs.10,000 reduction in selling price from Rs.80,000 per unit, 2
additional units can be sold. The variable cost to manufacture the product is Rs.50,000 per
unit.

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69: B
Description :
The correct answer is Rs.65,000 per unit.
As per the profit maximization model,
Price = a - bQ and Marginal Revenue = a - 2bQ

where a is the selling price at which demand is nil, b is the slope of the line and Q is the
quantity demanded.

Here a = Rs.80,000 per unit, b = (change in price / change in units) = (10,000 / 2) = 5,000
and Q is the quantity demanded.
Price = 80,000 - 5,000Q

Marginal revenue= 80,000 - 2 (5,000) × Q = 80,000 - 10,000Q

Marginal cost = Rs.50,000 per unit.

Profit is maximum where Marginal Revenue = Marginal Cost.

80,000 - 10,000Q = 50,000
10,000 Q = 30,000. Therefore Q = 3 units
Therefore, selling price at which profit will be maximum = Price = a - bQ
= 80,000 - 5,000(3) = 65,000 per unit.
70: D
Description : Product mix decision is short term decisions where bottleneck or limiting
factor is involved. Short term decisions have two characteristics that make them relatively
easier than longer term decisions. Firstly, the time value of money can be ignored, secondly
most of the fixed costs will be incurred anyway so can be ignored as not relevant. In such
cases the main approach is usually to consider relevant cash flows, which may simplify to
looking at the impact of the decision on the contribution. Hence contribution per unit of
limiting factor shall be used to make the decisions
71: B
Description :
Following acceptance by early innovators, conventional consumers start following their lead.
New competitors are likely to now enter the market attracted by the opportunities for
large scale production and profit. Company may wish to discourage competitors from
entering the market by lowering the price and thereby lowering the unit profitability. The
price needs to be lowered so that the product becomes attractive to different market
segments thus increasing demand to achieve the growth in sales volume.

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