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7/30/2019 Case - Bharat Polyplex
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Case PresentationBharat Polyplex
Group 7
Arun (13)
Rachit (43)
Raman (45)
Sachin (46)
Sandeep J (48)
Sandeep Y (49)
Subodh (51)
Presented to: Prof. Nand DhamejaCourse: MANAC II
7/30/2019 Case - Bharat Polyplex
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CurrentSituation
As the decision is for the future, need additional details to find out the
Future/Relevant Cost to evaluate the proposal of Packages Limited.
Additional Information Required:
Current Inventory Levels
Detail about production expenses and maintenance expenses
What will happen with workers?
Current Situation
Materials 70,000
Manpower 50,000
Manager's Salary 8,000
Rent 4,500
Depreciation of Equip 15,000
Maintenance of Equip 3,600
Other Expenses 15,750
Gen Admin O/Hs 22,500
Total 189,350
Direct Expenses
Dept O/Hs
Packages Limited Quotation
Annual Rate 1,25,000
No. of Packages 10,000
Contract Term 5 YearsAfterwards to be renewable
from year to year
Annual Rate 37,500
Contract Term 5 YearsAfterwards to be renewable
from year to year
Supply of New Packages
Maintenance Work
7/30/2019 Case - Bharat Polyplex
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AlternativesEvaluation
Alternative 1
Cost Object Year1 Year2 Year3 Year4 Year5 Remarks
Materials - - - - -
Labour (Pension) 7,500 7,500 7,500 7,500 7,500 Pension of FIVE senior workers. For example, Walters and Hary.
Labour (Quality
Control)3,500 3,675 3,859 4,052 4,254
Assuming that there will be an additional employee required for inspection and quality control
costing Rs 3,500/year at start of Year 1 with annual increment of 5% every year
Manager's Salary - - - - -
Rent (4,000) (4,200) (4,410) (4,631) (4,862)
Overhead rent in the beginning was 4500 and rent saved for Year1 is 8500. So, net rent saved for
Year1 was -4000 (4500-8500).
Also, assuming rent gets increased by 5% every year, net rent saving will vary as shown.
M/c Depreciation - - - - -
Maintenance - - - - -
Other Expenses - - - - -
Gen Admin O/H - - - - -
Interest Earned (10,000) (11,000) (12,100) (13,310) (14,641)
Interest earned @ yearly compounded rate of interest of 10% on investement of money earned by
selling Machine (20,000) and PHZ (80,000=500*160).
Bharat Polyplex convinced Packages Limited to buy 160 tonnes of PHZ @ Rs 500/ton.
Annual Charge of
Supply of Packages125,000 125,000 125,000 125,000 125,000 Assuming that Packages used equals 10,000.
Annual Charge of
Maintenance 37,500 37,500 37,500 37,500 37,500
Total 159,500 158,475 157,349 156,111 154,751 786,186
Outsource Both Supply & Maintenance of Packages
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AlternativesEvaluationcontAlternative 2
Only Outsource Supply of Packages, In-house Maintenance
Cost Object Year1 Year2 Year3 Year4 Year5 Remarks
Materials (PHZ) 1,600 1,600 1,600 1,600 1,600
Amount of PHZ used every year is 1,60 0 = 4*400(As 400 is the realisable unit price).
Assuming same quantity of 4 tonnes of PHZ is us ed every year and Bharat Polyplex kept 20 tonnes
of PHZ with themselves and sold remaining to Packages Limited
Materials (Others) 5,000 5,250 5,513 5,788 6,078
Assuming same quanity of materials will be used for next 5 years.
10% of total (70,000-20,000) is used for maintenance. So, for first year other materials used will be
5,000.
Assuming cost of other materials increase by 5% every year.
Labour (Regular) 10,000 10,500 11,025 11,576 12,155 Only one fifth of workers are required for maintenance.Also assuming that manpower costs increase by 5% every year
Labour (Quality
Control)3,500 3,675 3,859 4,052 4,254
Assuming that there will be an additional employee required for inspection and quality control
costing Rs 3,500/year at start of Year 1 with annual increment of 5% every year
Manager's Salary 5,000 5,250 5,513 5,788 6,0788000-3000 (Saving by handing over supervision to foreman).
Also assuming that salary gets incremented by 5 % each year
Rent 4,500 4,725 4,961 5,209 5,470No space savings.
Also assuming that rent gets increased by 5% every year
M/c Depreciation - - - - -
Maintenance - - - - -
Other Expenses 6,500 6,825 7,166 7,525 7,901 Assuming that other expenses gets increased by 5% every yearGen Admin O/H - - - - -
Interest Earned (9,000) (9,900) (10,890) (11,979) (13,177)
Interest earned @ yearly compounded rate of interest of 10% on investement of money earned by
selling Machine (20,000) and PHZ (70,000=500*140).
Bharat Polyplex convinced Packages Limited to buy 14 0 tonnes of PHZ @ Rs 500 /ton and decided to
keep 20 tonnes of PHZ with themselves for maintenance for next 5 years at the consumption rate of
4 tonnes/year (10% of total material) for maintenance.
Annual Charge of
Supply of Packages125,000 125,000 125,000 125,000 125,000
Annual Charge ofMaintenance
- - - - -
Total 152,100 152,925 153,746 154,559 155,358 768,688
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AlternativesEvaluationcontAlternative 3
Only Outsource Maintenance on Packages
Cost Object Year1 Year2 Year3 Year4 Year5 Remarks
Materials (PHZ) 14,400 14,400 14,400 14,400 20,400
For first year, quantity of PHZ used=36 tonnes (10% was used for maintenance; which has been
outsourced)
Amount of PHZ used is 14,400 = 36*400(As 400 is the realisable unit price).
160 tonnes of PHZ is lying in stock (already purchased) at the beginning of Year1. Rate of
consumption of PHZ is 36 tonnes / year.
So, current stock can fulfil next 4 years of PHZ requirement and partially of 5th year. 16 tonnes will
be available for 5th year.
20 tonnes will need to be purchased for 5th year.
Also, 4 years ago, PHZ costed 500/unit and now it costs 600/unit; an increase of 100/unit in 4 years
which means 25/unit in a year, which means 5% increase every year.Extrapolating this, the cost of PHZ for 5th year in future will be 700.
Materials (Others) 45,000 47,250 49,613 52,093 54,698
Quanity of materials used will be 90% of total used (10% was used for maintenance; which has been
outsourced)
So, for first year, amount of other materials used is 45000 (.9*50000).
Assuming same quantity of other materials is used for next five years and cost of other materials
increase by 5% every year.
Labour 40,000 42,000 44,100 46,305 48,620
Assuming 4/5th of manpower is used for new packages as 1/5th is used for maintenance.
Keeping oldest workers.
Also assuming that manpower costs increase by 5% every year
Manager's Salary 8,000 8,400 8,820 9,261 9,724 Assuming that manager's salary increase by 5% every year
Rent 4,500 4,725 4,961 5,209 5,470 Assuming rent increases by 5% every year
M/c Depreciation 5,000 5,000 5,000 5,000 -Saleable price of machine is 20,000 and life remaining is 4 years. So the value of machine used everyyear is 5,000.
Also assuming that the same machine can be used for 5th year
Maintenance 3,600 3,600 3,600 3,600 3,600
Other Expenses 9,250 9,713 10,198 10,708 11,243
Other expenses for new packages for first year will be 9250 = 15750-6500 (As expenses for
maintenance are 6500; which is being outsourced)
Also assuming that other expenses gets increased by 5% every year
Gen Admin O/H - - - - -
Interest Earned - - - - -
Annual Charge of
Supply of Packages- - - - -
Annual Charge of
Maintenance37,500 37,500 37,500 37,500 37,500
Total 167,250 172,588 178,192 184,076 191,255 893,361
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AlternativesEvaluationcont
Alternative 4Do not outsource at all
Cost Object Year1 Year2 Year3 Year4 Year5 Remarks
Materials (PHZ) 16,000 16,000 16,000 16,000 28,000
For first year, assuming same quantity of 40 tonnes of PHZ is used.
Amount of PHZ used is 16,000 = 40*400(As 400 is the realisable unit price).
160 tonnes of PHZ is lying in stock (already purchased) at the beginning of Year1. Rate of
consumption of PHZ is 40 tonnes / year.
So, current stock can fulfil next 4 years of PHZ requirement.
4 years ago, PHZ costed 500/unit and now it costs 600/unit; an increase of 100/unit in 4 years
which means 25/unit in a year, which means 5% increase every year.Extrapolating this, the cost of PHZ for 5th year in future will be 700.
Materials (Others) 50,000 52,500 55,125 57,881 60,775Same quantity of other materials are used.
Also assuming that cost of materials increase by 5% every year.
Labour 50,000 52,500 55,125 57,881 60,775 Assuming that manpower costs increase by 5% every year
Manager's Salary 8,000 8,400 8,820 9,261 9,724 Assuming that manpower costs increase by 5% every year
Rent 4,500 4,725 4,961 5,209 5,470 Assuming rent increases by 5% every year
M/c Depreciation 5,000 5,000 5,000 5,000 -
Saleable price of machine is 20,000 and life remaining is 4 years. So the value of machine used every
year is 5,000.
Also assuming that the same machine can be used for 5th year
Maintenance 3,600 3,600 3,600 3,600 3,600
Other Expenses 15,750 16,538 17,364 18,233 19,144 Assuming that other expenses increase by 5% every year
Gen Admin O/H - - - - -
Interest Earned - - - - -
Annual Charge of
Supply of Packages- - - - -
Annual Charge ofMaintenance
- - - - -
Total 152,850 159,263 165,996 173,065 187,489 838,662
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Conclusion
Alternative 2 Only Outsource Supply of PackagesFor first 5 yearsFrom 6th Year OnwardsAlternative 1 Outsource Both Supply & Maintenance of PackagesAlternative2isgoodfor5years.Afterwards,Alternative1shouldbeselectedasfrom 5th year onwards, costof Alternative 1 is less than cost of Alternative 2.
No. Alternative Year 1 Year 2 Year 3 Year 4 Year 5 Total
1Outsource Both Supply &
Maintenance of Packages159,500 158,475 157,349 156,111 154,751 786,186
2Only Outsource Supply of
Packages152,100 152,925 153,746 154,559 155,358 768,688
3
Only Outsource Maintenance on
Packages 167,250 172,588 178,192 184,076 191,255 893,361
4 Do not outsource at all 152,850 159,263 165,996 173,065 187,489 838,662
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Q & A