Bharat Polyplex Case

7/30/2019 Bharat Polyplex Case

1/11

Current Situation

Materials 70,000

Manpower 50,000

Manager's Salary 8,000Rent 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

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

Additional Information Required:Breakup of packages production and maintenance on packages

Current Inventory Levels

What will happen with workers?

Supply of New Packages

Maintenance Work

Direct Expenses

Dept O/Hs

As the decision is for the future, need additional details to find out the

future/Relevant Cost to compare the proposal of Packages Limited


2/11

Alternative 1

Cost Object Year1 Year2 Year3 Year4 Year5

Materials - - - - -

Labour (Pension) 7,500 7,500 7,500 7,500 7,500

Labour (Quality

Control)3,500 3,675 3,859 4,052 4,254

Manager's Salary - - - - -

Rent (4,000) (4,200) (4,410) (4,631) (4,862)

M/c Depreciation - - - - -

Maintenance - - - - -

Other Expenses - - - - -Gen Admin O/H - - - - -

Interest Earned (10,000) (11,000) (12,100) (13,310) (14,641)

Annual Charge of

Supply of Packages125,000 125,000 125,000 125,000 125,000

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

Alternative 2

Only Outsource Supply of Packages, In-house Maintenance


Materials (PHZ) 1,600 1,600 1,600 1,600 1,600

Materials (Others) 5,000 5,250 5,513 5,788 6,078

Outsource Both Supply & Maintenance of Packages


3/11

Labour (Regular) 10,000 10,500 11,025 11,576 12,155

Labour (Quality

Control)3,500 3,675 3,859 4,052 4,254

Manager's Salary 5,000 5,250 5,513 5,788 6,078

Rent 4,500 4,725 4,961 5,209 5,470

M/c Depreciation - - - - -

Maintenance - - - - -

Other Expenses 6,500 6,825 7,166 7,525 7,901

Gen Admin O/H - - - - -

Interest Earned (9,000) (9,900) (10,890) (11,979) (13,177)

Annual Charge of

Supply of Packages125,000 125,000 125,000 125,000 125,000

Annual Charge of

Maintenance- - - - -

Total 152,100 152,925 153,746 154,559 155,358

Alternative 3

Only Outsource Maintenance on Packages



4/11

Materials (PHZ) 14,400 14,400 14,400 14,400 20,400


Labour 40,000 42,000 44,100 46,305 48,620

Manager's Salary 8,000 8,400 8,820 9,261 9,724

Rent 4,500 4,725 4,961 5,209 5,470

M/c Depreciation 5,000 5,000 5,000 5,000 -

Maintenance 3,600 3,600 3,600 3,600 3,600

Other Expenses 9,250 9,713 10,198 10,708 11,243


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


5/11

Alternative 4

Do not outsource at all


Materials (PHZ) 16,000 16,000 16,000 16,000 28,000


Labour 50,000 52,500 55,125 57,881 60,775Manager's Salary 8,000 8,400 8,820 9,261 9,724

Rent 4,500 4,725 4,961 5,209 5,470

M/c Depreciation 5,000 5,000 5,000 5,000 -

Maintenance 3,600 3,600 3,600 3,600 3,600

Other Expenses 15,750 16,538 17,364 18,233 19,144


Interest Earned - - - - -

Annual Charge of

Supply of Packages- - - - -

Annual Charge of

Maintenance- - - - -

Total 152,850 159,263 165,996 173,065 187,489


6/11

Remarks

Pension of FIVE senior workers. For example, Walters and Hary.

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

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.

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.

Assuming that Packages used equals 10,000.

786,186

Remarks

Amount of PHZ used every year is 1,600 = 4*400(As 400 is the realisable unit price).

Assuming same quantity of 4 tonnes of PHZ is used every year and Bharat Polyplex kept

20 tonnes of PHZ with themselves and sold remaining to Packages Limited

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.


7/11

Only one fifth of workers are required for maintenance.

Also assuming that manpower costs increase by 5% every year

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

8000-3000 (Saving by handing over supervision to foreman).

Also assuming that salary gets incremented by 5% each yearNo space savings.

Also assuming that rent gets increased by 5% every year

Assuming that other expenses gets increased by 5% every year

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 140 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.

768,688

Remarks


8/11

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. 16tonnes 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.

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.

maintenance.

Keeping oldest workers.

Assuming that manager's salary increase by 5% every year

Assuming rent increases by 5% every year

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

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

893,361


9/11

Remarks

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.

Same quantity of other materials are used.

Also assuming that cost of materials increase by 5% every year.

Assuming that manpower costs increase by 5% every yearAssuming that manpower costs increase by 5% every year

Assuming rent increases by 5% every year

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

Assuming that other expenses increase by 5% every year

838,662


10/11

No. Alternative Year 1 Year 2 Year 3 Year 4

1Outsource Both Supply &

Maintenance of Packages159,500 158,475 157,349 156,111

2 Only Outsource Supply of Packages 152,100 152,925 153,746 154,559

3 Only Outsource Maintenance onPackages

167,250 172,588 178,192 184,076

4 Do not outsource at all 152,850 159,263 165,996 173,065


11/11

Year 5 Total

154,751 786,186

155,358 768,688

191,255 893,361

187,489 838,662

Bharat Polyplex Case

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