Case - Bharat Polyplex

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


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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


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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


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


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


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


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


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

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Case - Bharat Polyplex