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Case 1: Zip Zap Zoom Car Company
Zip Zap Zoom
Company Ltd is into manufacturing cars in the small car (800 cc) segment. It was set up 15 years back and since its
establishment it has seen a phenomenal growth in both its market and
profitability. Its financial statements
are shown in Exhibits 1 and 2 respectively.
The company enjoys the confidence of
its shareholders who have been rewarded with growing dividends year after
year. Last year, the company had
announced 20 per cent dividend, which was the highest in the automobile
sector. The company has never defaulted
on its loan payments and enjoys a favourable face with its lenders, which
include financial institutions, commercial banks and debenture holders.
The competition in the car industry
has increased in the past few years and the company foresees further
intensification of competition with the entry of several foreign car
manufactures many of them being market leaders in their respective
countries. The small car segment
especially, will witness entry of foreign majors in the near future, with
latest technology being offered to the Indian customer. The Zip Zap Zoom’s senior management realizes
the need for large scale investment in up gradation of technology and
improvement of manufacturing facilities to pre-empt competition.
Whereas on the one hand, the
competition in the car industry has been intensifying, on the other hand, there
has been a slowdown in the Indian economy, which has not only reduced the
demand for cars, but has also led to adoption of price cutting strategies by
various car manufactures. The industry
indicators predict that the economy is gradually slipping into recession.
Exhibit 1 Balance sheet as at March 31,200
x
(Amount in Rs. Crore)
Source of
Funds
Share capital 350
Reserves
and surplus 250 600
Loans
:
Debentures
(@ 14%) 50
Institutional
borrowing (@ 10%) 100
Commercial
loans (@ 12%) 250
Total
debt 400
Current
liabilities 200
1,200
Application
of Funds
Fixed
Assets
Gross
block 1,000
Less
: Depreciation 250
Net
block 750
Capital
WIP 190
Total
Fixed Assets 940
Current
assets :
Inventory
200
Sundry
debtors 40
Cash
and bank balance 10
Other
current assets 10
Total
current assets 260
-1200
Exhibit 2 Profit and
Loss Account for the year ended March 31, 200x
(Amount in Rs. Crore)
Sales
revenue (80,000 units x Rs. 2,50,000) 2,000.0
Operating
expenditure :
Variable
cost :
Raw
material and manufacturing expenses 1,300.0
Variable
overheads 100.0
Total 1,400.0
Fixed cost
:
R
& D 20.0
Marketing
and advertising 25.0
Depreciation
250.0
Personnel
70.0
Total 365.0
Total
operating expenditure 1,765.0
Operating
profits (EBIT) 235.0
Financial expense :
Interest on
debentures 7.7
Interest on
institutional borrowings 11.0
Interest on
commercial loan 33.0 51.7
Earnings before tax (EBT) 183.3
Tax (@ 35%) 64.2
Earnings after tax (EAT) 119.1
Dividends 70.0
Debt redemption (sinking fund obligation)**
40.0
Contribution to reserves and surplus 9.1
* Includes the
cost of inventory and work in process (W.P) which is dependent on demand
(sales).
** The loans have
to be retired in the next ten years and the firm redeems Rs. 40 crore every year.
The company
is faced with the problem of deciding how much to invest in up
gradation of its plans and technology. Capital investment up to a maximum of Rs. 100
crore is
required. The problem areas are
three-fold.
- The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
- The company does not want to issue new equity shares and its retained earning are not enough for such a large investment. Thus, the only option is raising debt.
- The company wants to limit its additional debt to a level that it can service without taking undue risks. With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.
Mr. Shortsighted, the company’s Finance Manager, is given the task of
determining the additional debt that the firm can raise. He thinks that the firm can raise Rs. 100
crore worth debt and service it even in years of recession. The company can raise debt at 15 per cent
from a financial institution. While
working out the debt capacity. Mr.
Shortsighted takes the following assumptions for the recession years.
a)
A maximum of 10 percent reduction in sales volume will
take place.
b)
A maximum of 6 percent reduction in sales price of cars
will take place.
Mr. Shorsighted prepares a projected income statement which is
representative of the recession years.
While doing so, he determines what he thinks are the “irreducible
minimum” expenditures under recessionary conditions. For him, risk of insolvency is the main
concern while designing the capital structure.
To support his view, he presents the income statement as shown in
Exhibit 3.
Exhibit 3
projected Profit and Loss account
(Amount in Rs. Crore)
Sales
revenue (72,000 units x Rs. 2,35,000) 1,692.0
Operating
expenditure
Variable
cost :
Raw
material and manufacturing expenses 1,170.0
Variable
overheads 90.0
Total 1,260.0
Fixed cost
:
R
& D ---
Marketing
and advertising 15.0
Depreciation 187.5
Personnel
70.0
Total 272.5
Total
operating expenditure 1,532.5
EBIT 159.5
Financial expenses :
Interest on existing
Debentures 7.0
Interest on existing
institutional borrowings 10.0
Interest on commercial
loan 30.0
Interest on additional
debt 15.0 62.0
EBT 97.5
Tax (@ 35%) 34.1
EAT 63.4
Dividends --
Debt redemption (sinking fund
obligation) 50.0*
Contribution to reserves and surplus
13.4
 |
* Rs. 40
crore (existing debt) + Rs. 10 crore (additional debt)
Assumptions of Mr. Shorsighted
- R & D expenditure can be done away with till the economy picks up.
- Marketing and advertising expenditure can be reduced by 40 per cent.
- Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.
He goes with his worked out statement to the Director Finance, Mr.
Arthashatra, and advocates raising Rs. 100 crore of debt to finance the
intended capital investment. Mr.
Arthashatra does not feel comfortable
with the statements and calls for the company’s financial analyst, Mr.
Longsighted.
Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and
points out that insolvency should not be the sole criterion while determining
the debt capacity of the firm. He points
out the following :
- Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
- Certain management policies like those relating to dividend payout, send out important signals to the investors. The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm. The firm should pay at least 10 per cent dividend in the recession years.
- Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations. This does not give the true picture. Net cash inflows should be used to determine the amount available for servicing the debt.
- Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession. It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on. Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed. From this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution). This will give a true picture of how the company’s cash flows will behave in recession conditions.
The management recognizes that the alternative suggested by Mr.
Longsighted rests on data, which are complex and require expenditure of time
and effort to obtain and interpret.
Considering the importance of capital structure design, the Finance
Director asks Mr. Longsighted to carry out his analysis. Information on the behaviour of cash flows
during the recession periods is taken into account.
The methodology
undertaken is as follows :
(a)
Important factors that affect cash flows (especially
contraction of cash flows), like sales volume, sales price, raw materials
expenditure, and so on, are identified and the analysis is carried out in terms
of cash receipts and cash expenditures.
(b)
Each factor’s behaviour (variation behaviour) in
adverse conditions in the past is studied and future expectations are combined
with past data, to describe limits (maximum favourable), most probable and
maximum adverse) for all the factors.
(c)
Once this information is generated for all the factors
affecting the cash flows, Mr. Longsighted comes up with a range of estimates of
the cash flow in future recession periods based on all possible combinations of
the several factors. He also estimates
the probability of occurrence of each estimate of cash flow.
Assuming
a normal distribution of the expected behaviour, the mean expected
value of net
cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard
deviation of Rs. 110 crore.
Keeping in mind the looming
recession and the uncertainty of the recession behaviour, Mr. Arthashastra
feels that the firm should factor a risk of cash inadequacy of around 5 per
cent even in the most adverse industry conditions. Thus, the firm should take up only that
amount of additional debt that it can service 95 per cent of the times, while
maintaining cash adequacy.
To maintain an annual dividend of 10
per cent, an additional Rs. 35 crore has to be kept aside. Hence, the expected available net cash inflow
is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)
Question:
Analyse the debt
capacity of the company.
CASE – 2 GREAVES LIMITED
Started as trading
firm in 1922, Greaves Limited has diversified into manufacturing and marketing
of high technology engineering products and systems. The company’s mission is
“manufacture and market a wide range of high quality products, services and
systems of world class technology to the total satisfaction of customers in
domestic and overseas market.”
Over the years Greaves has brought
to India state of the art technologies in various engineering fields by setting
up manufacturing units and subsidiary and associate companies. The sales of
Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in
1997. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to
Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company
increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the
company’s share has shown ups and downs during 1990 to 1997. How has the
company performed? The following question need answer to fully understand the
performance of the company:
Exhibit 1
|
GREAVES LTD.
Profit and
Loss Account ending on 31 March
(Rupees in crore)
|
||||||||
|
|
1990
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
|
Sales
Raw Material and Stores
Wages and Salaries
Power and fuel
Other Mfg. Expenses
Other Expenses
Depreciation
Marketing and Distribution
Change in stock
|
214.38
170.67
13.54
0.52
0.61
11.85
1.85
4.86
1.18
|
253.10
202.84
15.60
0.70
0.49
15.48
1.72
5.67
3.10
|
287.81
230.81
18.03
1.11
0.88
16.35
1.52
5.14
4.93
|
311.14
213.79
37.04
3.80
2.37
25.54
4.62
5.17
0.48
|
354.25
245.63
37.96
4.43
2.36
31.60
5.99
9.67
- 1.13
|
521.56
379.83
48.24
6.66
3.57
41.40
8.53
10.81
5.63
|
728.15
543.56
60.48
7.70
4.84
45.74
9.30
12.44
11.86
|
801.11
564.35
69.66
9.23
5.49
48.64
11.53
16.98
- 5.87
|
|
Total Op Expenses
|
202.72
|
239.40
|
268.91
|
291.85
|
338.77
|
493.41
|
672.20
|
731.75
|
|
Operating Profit
Other Income
Non-recurring Income
|
11.61
2.14
1.30
|
13.70
3.69
2.28
|
18.90
4.97
0.10
|
19.29
4.24
10.98
|
15.48
7.72
16.44
|
28.15
14.35
0.46
|
55.95
11.35
0.52
|
69.36
13.08
1.75
|
|
PBIT
|
15.10
|
19.67
|
23.97
|
34.51
|
39.64
|
42.98
|
65.67
|
82.64
|
|
Interest
|
5.56
|
6.77
|
11.92
|
19.62
|
17.17
|
21.48
|
28.25
|
27.54
|
|
PBT
|
9.54
|
12.90
|
12.05
|
14.89
|
22.47
|
21.50
|
37.42
|
55.10
|
|
Tax
PAT
Dividend
Retained Earnings
|
3.00
6.54
1.80
4.74
|
3.60
9.30
2.00
7.30
|
4.90
7.15
2.30
4.85
|
0.00
14.89
4.06
10.83
|
4.00
18.47
7.29
11.18
|
7.00
14.50
8.58
5.92
|
8.60
28.82
12.85
15.97
|
15.80
39.30
14.18
25.12
|
Exhibit 2
|
GREAVES LTD.
Balance Sheet (Rupees in
crore)
|
||||||||
|
|
1990
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
|
ASSETS
Land and Building
Plant and Machinery
Other Fixed Assets
Capital WIP
Gross Fixed Assets
Less: Accu. Depreciation
Net Tangible Fixed Assets
Intangible Fixed Assets
|
3.88
11.98
3.64
0.09
19.59
12.91
6.68
0.21
|
4.22
12.68
4.14
0.26
21.30
14.56
6.74
0.19
|
4.96
12.98
4.38
10.25
23.57
15.79
7.78
0.05
|
21.70
33.49
5.18
11.27
71.64
19.84
51.80
4.40
|
30.82
50.78
6.95
34.84
123.39
25.74
97.65
22.03
|
39.71
75.34
8.53
14.37
137.95
33.90
104.05
22.45
|
42.34
92.49
8.87
13.92
157.62
42.56
115.06
20.04
|
43.07
104.45
10.35
14.36
172.23
53.87
118.86
21.11
|
|
Net Fixed Assets
|
6.89
|
6.93
|
7.83
|
56.20
|
119.68
|
126.50
|
135.10
|
139.97
|
|
Raw Materials
Finished Goods
Inventory
Accounts Receivable
Other Receivable
Investments
Cash and Bank Balance
Current Assets
Total Assets
LIABILITIES AND CAPITAL
Equity Capital
Preference Capital
Reserves and Surplus
|
5.26
29.37
34.63
38.16
32.62
3.55
8.36
117.32
124.21
9.86
0.20
27.60
|
6.91
33.72
40.63
53.24
40.47
14.95
8.91
158.20
165.13
9.86
0.20
32.57
|
7.26
38.65
45.91
67.97
49.19
15.15
12.71
190.93
198.76
9.86
0.20
37.42
|
21.05
53.39
74.44
93.30
24.54
27.58
13.29
233.15
289.35
18.84
0.20
100.35
|
28.13
52.26
80.39
122.20
59.12
73.50
18.38
353.59
473.27
29.37
0.20
171.03
|
44.03
58.09
102.12
133.45
64.32
75.01
30.08
404.98
531.48
29.44
0.20
176.88
|
53.62
69.97
123.59
141.82
76.57
75.07
33.46
450.51
585.61
44.20
0.20
175.41
|
50.94
64.09
115.03
179.92
107.31
76.45
48.18
526.89
666.86
44.20
0.20
198.79
|
|
Net Worth
|
37.66
|
42.63
|
47.48
|
119.39
|
200.60
|
206.52
|
219.81
|
243.19
|
|
Bank Borrowings
Institutional Borrowings
Debentures
Fixed Deposits
Commercial Paper
Other Borrowings
Current Portion of LT Debt
|
14.81
4.13
4.77
12.31
0.00
2.33
0.00
|
19.45
3.43
16.57
14.45
0.00
3.22
0.00
|
26.51
9.17
19.99
15.03
0.00
3.10
0.08
|
24.82
38.09
4.56
14.08
0.00
3.18
0.12
|
55.12
38.76
4.37
15.57
15.00
17.08
15.08
|
64.97
69.69
4.37
17.75
0.00
1.97
0.02
|
70.08
89.26
2.92
20.81
0.00
2.36
1.49
|
118.28
63.60
1.49
19.29
0.00
2.57
1.57
|
|
Borrowings
|
38.35
|
57.12
|
73.72
|
84.61
|
130.82
|
158.73
|
183.94
|
203.66
|
|
Sundry Creditors
Other Liabilities
Provision for tax, etc.
Proposed Dividends
Current Portion of LT Dept
|
37.52
5.70
3.18
1.80
0.00
|
49.40
10.16
3.82
2.00
0.00
|
59.34
10.70
5.14
2.30
0.08
|
77.27
3.59
0.31
4.06
0.12
|
113.66
1.42
4.40
7.29
15.08
|
148.13
1.99
7.70
8.58
0.02
|
153.63
1.70
12.19
12.85
1.49
|
179.79
3.04
21.43
14.18
1.57
|
|
Current Liabilities
|
48.20
|
65.38
|
77.56
|
85.35
|
141.85
|
166.42
|
181.86
|
220.01
|
|
TOTAL LIABILITIES
Additional information:
Share premium reserve
Revaluation reserve
Bonus equity capital
|
124.21
8.51
|
165.13
8.51
|
198.76
8.51
|
289.35
47.69
8.91
8.51
|
473.27
107.40
8.70
8.51
|
531.67
107.91
8.50
8.51
|
585.61
93.35
8.31
23.25
|
666.86
93.35
8.15
23.25
|
Exhibit 3
|
GREAVES LTD.
Share Price Data
|
||||||||
|
|
1990
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
|
Closing share price (Rs)
Yearly high share price (Rs)
Yearly low share price (Rs)
Market capitalization (Rs crore
EPS (Rs)
Book value (Rs)
|
27.19
29.25
26.78
65.06
4.79
35.64
|
34.74
45.28
21.61
67.77
6.82
37.22
|
121.27
121.27
34.36
236.56
9.73
42.54
|
66.67
126.33
48.34
274.84
1.93
57.75
|
78.34
90.00
42.67
346.35
2.66
40.61
|
71.67
100.01
68.34
316.87
7.16
64.98
|
47.5
90.00
45.00
210.02
5.03
45.35
|
48.25
85.00
43.75
213.34
9.01
50.73
|
Questions
- How profitable are its operations? What
are the trends in it? How has growth affected the profitability of the
company?
- What factors have contributed to the
operating performance of Greaves Limited? What is the role of
profitability margin, asset utilisation, and non-operating income?
- How has Greaves performed in terms of
return on equity? What is the contribution of return on investment, the
way of the business has been financed over the period?
CASE – 3 CHOOSING BETWEEN PROJECTS IN ABC COMPANY
ABC Company, has three projects to choose from. The Finance
Manager, the operations manager are discussing and they are not able to come to
a proper decision. Then they are meeting a consultant to get proper advice. As
a consultant, what advice you will give?
The cash flows are as follows. All amounts are in lakhs of
Rupees.
Project 1:
Duration 5 Years
Beginning cash outflow = Rs. 100
Cash inflows (at the end of the year)
Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3 – Rs 30; Yr.4 – 10; Yr.5
– 10
Project 2:
Duration 5 Years
Beginning Cash outflow Rs. 3763
Cash inflows (at the end of the year)
Yr. 1 – 200; Yr. 2 – 600; Yr. 3 – 1000; Yr. 4 – 1000; Yr. 5
– 2000.
Project 3:
Duration 15 Years
Beginning Cash Outflow – Rs. 100
Cash Inflows (at the end of the year)
Yrs. 1 to 10 – Rs. 20 (for 10 continuous years)
Yrs. 11 to 15 – Rs. 10 (For the next 5 years)
Question:
If the cost of capital is 8%, which of the 3 projects should
the ABC Company accept?
CASE – 4
STAR ENGINEERING COMPANY
Star Engineering
Company (SEC) produces electrical accessories like meters, transformers,
switchgears, and automobile accessories like taximeters and speedometers.
SEC buys the electrical components,
but manufactures all mechanical parts within its factory which is divided into
four production departments Machining, Fabrication, Assembly, and Painting—and
three service departments—Stores, Maintenance, and Works Office.
Though the company prepared annual
budgets and monthly financial statements, it had no formal cost accounting
system. Prices were fixed on the basis of what the market can bear. Inventory
of finished stocks was valued at 90 per cent of the market price assuming a
profit margin of 10 per cent.
In March, the company received a
trial order from a government department for a sample transformer on a
cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job
No 879) in early April and completed all manufacturing operations before the
end of the month.
Since Job No 879 was very different
from the type of transformers they had manufactured in the past, the company
did not have a comparable market price for the product. The purchasing officer
of the government department asked SEC to submit a detailed cost sheet for the
job giving as much details as possible regarding material, labour and overhead
costs.
SEC, as part of its routine
financial accounting system, had collected the actual expenses for the month of
April, by 5th of May. Some of the relevant data are given in Exhibit A.
The
company tried to assign directly, as many expenses as possible to the
production departments. However, It was not possible in all cases. In many
cases, an overhead cost, which was common to all departments had to be
allocated to the various departments using some rational basis. Some of the possible
bases were collected by SEC’s accountant. These are presented in Exhibit B.
He also designed a format to
allocate the overhead to all the production and service departments. It was
realized that the expenses of the service departments on some rational basis.
The accountant thought of distributing the service departments’ costs on the
following basis:
a. Works office costs on the basis of direct
labour hours.
b. Maintenance costs on the basis of book value
of plant and machinery.
c. Stores department costs on the basis of
direct and indirect materials used.
The accountant who had to visit the
company’s banker, passed on the papers to you for the required analysis and
cost computations.
REQUIRED
Based on the data
given in Exhibits A and B, you are required to:
- Complete the attached “overhead cost
distribution sheet” (Exhibit C).
Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis.
- Calculate the overhead cost (per direct
labour hour) for each of the four producing departments. This should
include share of the service departments’ costs.
- Do you agree with:
a. The procedure adopted by the company for the distribution of overhead costs?
b. The choice of the base for overhead absorption, i.e. labour-hour rate?
Exhibit A
|
STAR ENGINEERING COMPANY
Actual Expenses(Manufacturing Overheads)
for April
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RS
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RS
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Indirect Labour
and Supervisions:
Machining
Fabrication
Assembly
Painting
Stores
Maintenance
Indirect Materials
and Supplies
Machining
Fabrication
Assembly
Painting
Maintenance
Others
Factory Rent
Depreciation of
Plant and Machinery
Building Rates and
Taxes
Welfare Expenses
(At 2 per cent of
direct labour wages and Indirect labour and supervision)
Power
(Maintenance—Rs
366; Works Office Rs 2,200, Balance to Producing Departments)
Works Office
Salaries and Expenses
Miscellaneous
Stores Department Expenses
 |
33,000
22,000
11,000
7,000
44,000
32,700
2,200
1,100
3,300
3,400
 2,800
1,68,000
44,000
2,400
19,400
68,586
1,30,260
1,190
 |
1,49,700
12,800
4,33,930
5,96,930
 |
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Exhibit B
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STAR ENGINEERING COMPANY
Projected Operation Data for the Year
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Department
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Area
(sq.m)
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Original Book of Plant & Machinery
Rs
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Direct Materials
Budget
Rs
|
Horse
Power
Rating
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Direct
Labour
Hours
|
Direct
Labour
Budget
Rs
|
|
Machining
Fabrication
Assembly
Painting
Stores
Maintenance
Works Office
Total
|
13,000
11,000
8,800
6,400
4,400
2,200
2,200
48,000
|
26,40,000
13,20,000
6,60,000
2,64,000
1,32,000
1,98,000
68,000
52,80,000
|
62,40,000
21,60,000
10,80,000
94,80,000
|
20,000
10,000
1,000
2,000
33,000
|
14,40,000
5,28,000
7,20,000
3,30,000
30,18,000
|
52,80,000
25,40,000
13,20,000
6,60,000
99,00,000
|
Note
The estimates given
in this exhibit are for the budgeted year January to December where as the
actuals in Exhibit A are just one month—April of the budgeted year.
|
Exhibit C
STAR ENGINEERING COMPANY
Actual Overhead Distribution Sheet for
April
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Departments
Overhead Costs
|
Production Departments
|
Service Departments
|
Total Amount Actuals for April (Rs)
|
Basis for Distribution
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A. Allocation of
Overhead to all departments
A.1 Indirect Labour and Supervision
|
|
|
|
|
|
|
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1,49,700
|
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A.2 Indirect materials and supplies
|
|
|
|
|
|
|
|
12,800
|
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|
A.3 Factory Rent
|
|
|
|
|
|
|
|
1,68,000
|
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||
|
A.4 Depreciation of Plant and Machinery
|
|
|
|
|
|
|
|
44,000
|
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|
A.5 Building Rates and Taxes
|
|
|
|
|
|
|
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2,400
|
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A.6 Welfare Expenses
|
|
|
|
|
|
|
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19,494
|
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A.7 Power
|
|
|
|
|
|
|
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68,586
|
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A.8 Works Office Salaries and Expenses
|
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|
|
|
|
|
|
1,30,260
|
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A.9 Miscellaneous Stores Expenses
|
|
|
|
|
|
|
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1,190
|
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A. Total (A.1 to A.9)
|
|
|
|
|
|
|
|
5,96,430
|
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B. Reallocation of Service Departments
Costs to Production Departments
|
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B.1 Distribution of Works Office Costs
|
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B.2 Distribution of Maintenance
Department’s Costs
|
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B.3 Distribution of Stores Department’s
Costs
|
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Total Charged to Producing
C. Departments (A+B)
|
|
|
|
|
|
|
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5,96,430
|
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D. Labour Hours Actuals for April
|
1,20,000
|
44,000
|
60,000
|
27,500
|
|
|
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|
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E. Overhead Rate/Per Hour (D)
|
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Case 5: EASTERN MACHINES COMPANY
Raj, who was in charge production
felt that there are many problems to be attended to. But Quality Control was
the main problem, he thought, as he found there were more complaints and
litigations as compared to last year. With the demand increasing, he does not
want to take any chances.
So he went down to assembly line, but was greeted by an
unfamiliar face. He introduced himself.
Raj: I am in charge of checking the components, which
we use, when we assemble the machines for customers. For most of the
components, suppliers are very reliable and we assume that there will not be
any problem. When we generally test the end product, we don’t have failures.
Namdeo: I am Namdeo. I was in another dept. and has
been transferred recently to this dept.
Raj: Recently we
have been having problems, and there has been some complaint or other about the
machines we have supplied. I am worried and would like to check the components
used. I would like to avoid lot of expensive rework.
Namdeo: But it would be very expensive to test every
one of them. It will take at least half an hour for each machine. I neither
have the staff nor the time. It will be rather pointless as majority of them
will pass the test.
Raj: There has been more demand than supply for these
machines in last 2 years. We have been buying many components from many
suppliers. We have been producing more with extra shifts. We are trying to
capture the market and increase our market share.
Namdeo: We order for components from different
places, and sometimes we do not have time to check all. There is a time lag between
order and supply of components, and we cannot wait as production will stop. We
use whatever comes soon as we want to complete our orders.
Raj: Oh! Obviously we need some kind of checking.
Some sampling technique to check the quality of the components. We need to get
a sample from each shipment from our component suppliers. But I do not know how
many we should test.
Namdeo: We should ask somebody from our statistics
dept. to attend to this problem.
As a Statistician, advice what kind of Sampling schemes can
we consider, and what factors will influence choice of scheme. What are the
questions we should ask Mr. Namdeo, who works in the assembly line?
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