MANGEMENT DEVELOPMENT INSTITUTE GURGAON

BHARAT CASE ANALYSIS

Assignment for MANAC -II
06 December 2012

Group 1 Section D (PGPM)

Arunabh Thakur Abhro Gupta Love Kumar Pranjal Singh Satish Kumar Deepak Gupta

12P190 12P200 12P210 12P220 12P230 12P240

This assignment is being submitted to Prof. Nand Dhameja as a requirement for completion of the course of Managerial Accounting - II in Term II at Management Development Institute, Gurgaon

BHARAT CASE ANALYSIS

BHARAT CASE ANALYSIS Objective: Saving money and maximizing profit for Bharat

Problem Area: In this case, the problem area is specific to the packaging department. The cost incurred by the company specific to the packaging department needs to be minimized

Alternatives: 1. 2. 3. 4. Full In-house (production as well as maintenance of new packages) Full outsource (production as well as maintenance of new packages) Production of new packages in-house and outsource maintenance work on packages Production of new packages outsourced and maintenance work in-house

Evaluation of each alternative: The below given table calculates the total cost per year for each alternative
CONTINUE (a) CLOSE DOWN (b) 125000 66000 50000 8000 4500 5000 3600 15750 22500 3000 4500 -8500 66000 40000 8000 4500 5000 3600 15750 22500 37500 202850 811400 -3000 180100 720400 New Inhouse Maint Outsource (c) New Outsource Maint Inhouse (d) 125000 6600 10000 8000 4500 Differential (a-b) -125000 66000 47000 8000 0 8500 5000 3600 15750 0 -37500 0 -8650 -34600 Differential (a-c ) 0 0 10000 0 0 0 0 0 0 0 -37500 0 -27500 -110000 Differential (a-d) -125000 59400 40000 0 0 0 5000 3600 9250 0 0 3000 -4750 -19000

S. No. 1 2 3 4 5 7 8 9 10 11 12

ITEM Direct Expense Material labour Manager Salary Rent Machine Machine Maintenance Other expenses General Admin O/H Packaging maintenance Foreman Total Total for 4 years

22500 37500

6500 22500

175350 701400

184000 736000

Please note that the above shown differential values are only for 1 year. The material and the machinery can be used for the next four years and hence, the total cost in each case can be obtained by multiplying the total in each case by 4. If one would also like to factor in the cost to be borne for the fifth year (as the contract given to Packages Ltd. is for 5 years), one would have to assume the following details:

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BHARAT CASE ANALYSIS

1. New machine bought is at the same value i.e. Rs. 1,20,000 2. A new machine bought is good enough for 8 years. Based on the two assumptions, the cost of machine for the fifth year will be Rs. 15,000 Similarly, cost of GHL for the fifth year will be based on the cost of new material which if assumed to be taken at Rs. 600 per ton would cost Rs. 24,000 Hence, after 5 years we have
CONTINUE (a) CLOSE DOWN (b) 125000 74000 50000 8000 4500 15000 3600 15750 22500 3000 4500 -8500 74000 40000 8000 4500 15000 3600 15750 22500 37500 220850 1032250 -3000 180900 901300 New Inhouse Maint Outsource (c) New Outsource Maint Inhouse (d) 125000 7400 10000 8000 4500 Differential (a-b) -125000 74000 47000 8000 0 8500 15000 3600 15750 0 -37500 0 9350 -25250 Differential (a-c ) 0 0 10000 0 0 0 0 0 0 0 -37500 0 -27500 -137500 Differential (a-d) -125000 66600 40000 0 0 0 15000 3600 9250 0 0 3000 12450 -6550

S. No. 1 2 3 4 5 7 8 9 10 11 12

ITEM Direct Expense Material labour Manager Salary Rent Machine Machine Maintenance Other expenses General Admin O/H Packaging maintenance Foreman Total Total for 4 years

22500 37500

6500 22500

193350 894750

184000 920000

Conclusion: Hence, even after accounting for the 5 years, it is more cost effective to continue the whole process in-house based on the quantitative analysis done here.

Additional Information required: 1) Tax Factor: How much amount of tax per year is to be paid in each case. 2) Cash Advantage: How much interest per year can we obtain from the money obtained from resale of machinery and material (GHL) are sold in case we close down completely or only do the maintenance part in-house, how much interest per year can we obtain from the money obtained from resale? Is there any other better opportunity cost? 3) Inflation Factor Will there be any demand inflation for the packages and price inflation for the department in the future?

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BHARAT CASE ANALYSIS

4) Cartage Cost - What is the cost of transportation/cartage in case of outsourcing? Will the supplier supply the material directly or transportation will be borne by the department? 5) Patent Value - If the patent is being sold, what is the value obtained for the patent? 6) Time Value of Money - What will the value of money at the end of 5 years? 7) Is the money being paid by Packages ltd. in the beginning or at the end of the year? If it is at the beginning of the year, then this money obtained can be re-invested and additional revenue can be generated for the year. 8) Does the other expense for the department remain constant throughout? 9) Qualitative Factors Is the supplier reliable? Will the quality of the product be same? Will the employees in other department remain motivated as they are in case we close down? Will closing down the department spread a bad news in the industry?

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