MAC-II Moti Heera Analysis

Expenses distribution across locations:

Income Operating Expenses Direct Selling Expenses General Administrative and Selling Exp Cash lo! "ro#it$ %loss& 'ess( Depreciation )et "ro#it$ %'oss&

Mumbai 642854 212104 122821 166377 141552 141977 -425

Delhi 137731 38367 19327 97295 -17258 22980 -40238

Total 780585 250471 142148 263672 124294 164957 -40663

% Mumbai 82% 85% 86% 63% 114% 86% 1%

% Delhi 18% 15% 14% 37% -14% 14% 99%

Plant wise analysis (From July 1963 to December 1963):

Mumbai
Income .ariable Cost Contribution to Mumbai Fixed "un# Co$t %$ca&ab'e Fixed Co$t Total ixed Cost Contributin to 'ocal Compan/ O0 Mumbai ! ! and )ro*it$ ! "oster E* + 355,231 107,621 247,610 96,155 89,651 185,806 61,804 "aint E* , 206,261 72,305 133,956 32,344 51,502 83,846 50,110 2,300 2,300 24,344 Commercial E* 81,363 54,719 26,644 'ocation Total

642,855 234,645 408,210 128,499 143,453 271,952 136,258 89,482 46,776

Contribution to Com&an(

Fixed Co$t to "a'e$ ,rea# %-en Income .ocation Cont+/ "a'e$ 0atio Cont to "a'e$ 1)/- 0atio2

0+52 185,806 0+17 0+70

0+41 83,846 0+24 0+65

0+03 2,300 0+30 0+33

0+42 271,952 0+21 0+63

Delhi

"oster E* 1

"aint E* 2

Commercial E* 3

Income 3ariab'e Co$t Contribution to 4e'5i Fixed "un# Co$t %$ca&ab'e Fixed Co$t Total ixed Cost Contributin to .oca' Com&an( 4e'5i ! Contribution to Com&an( )ro*it$ ! !

99,899 40,619 59,280 13,608 15,938 29,546 29,734

23,318 3,867 19,451 4,068 5,518 9,586 9,865

14,516 9,884 4,632

137,733 54,370 83,363 128,9932

592 592 4,040

112,356 83,363 43,639 31,011

! and 12,628

Fixed Co$t to "a'e$ ,rea# %-en Income .ocation Cont+/ "a'e$ 0atio Cont to "a'e$ 1)/- 0atio2

0+30 29,546 0+30 0+59

0+41 9,586 0+42 0+83

0+04 592 0+28 0+32

0+61 83,363 0+32 0+61

perational and !ost Distribution "tructure at #oti $ %eera:

Moti & Heera

Bombay overhead

Delhi overhead

Paint Specific

Poster Specific

Commercial Specific

Paint Specific

Poster Specific

Commercial Specific

Sunk and Escapable Fixed Costs

"un& 'ixed costs: This is the component of fixed costs which have already incurred in the past This cannot be chan!ed and is irrelevant for decision ma"in! #x$ #%uipment& Machinery& 'and etc Escapable 'ixed costs: This is the component of fixed cost which has not yet been incurred This cost can be avoided by suspendin! the future production #x$ #lectricity re%uired for production& labor force etc #scapable fixed costs provide us with an option to limit the production after a certain volume So this can help us in decision ma"in! in terms of settin! production volume (f the brea")even point calculated usin! the total fixed cost *sun" + escapable, does not provide maximum profit& ad-ustments can be made to escapable fixed costs to !enerate maximum profits

Specific Fixed costs

.ixed cost incurred at a specific location for a specific operation of product This does not included overhead costs which are common to all the operations of a product and which are common to all locations /s per the above dia!ram& all the costs incurred at the lowest level are specific fixed costs

Overall vs. Individual Break-Even C art

0o& an overall brea")even chart for the company will not serve the same purpose as the individual charts mentioned in the case This is because of the followin! reasons$ 1 (n the overall chart you will not be able to tell the amount of contribution re%uired from each of the sub)units of the company i e Bombay)poster& Bombay)paint& Bombay) Commercial& Delhi)poster& Delhi 2paint& Delhi 2Commercial (n case of incremental production scenario& you will not be able to determine the costs re%uired in each sub)unit and also the differences in incremental revenue which any sub) unit can !enerate over the other #x$ P4 ratio of Delhi Paint is 5 67 whereas the P4 ratio of Delhi Commercial is 5 73& so if you want to increase the production volume with an aim to maximi8e profit& it will be beneficial to increase the Delhi paint volume rather than Delhi commercial This information will never be available in the overall brea")even chart

Si"nificance of Break-Even #oints

Brea" even charts as shown in the case provides followin! details for each sub)unit$ specific fixed cost& P4 ratio& brea")even point& contribution to overall overhead and profit The values for each individual sub)unit are mentioned in the sheet above

Brea")even points in !eneral si!nify the amount of production at which fixed cost !ets covered completely (n the context of this case we have individual brea"even points for each of the sub) units This si!nifies the amount of production re%uired in each sub)unit to cover only the specific fixed costs which are incurred in that particular sub)unit only (t does not account for common overheads incurred across sub)units& i e the local and company overhead (t thus helps in settin! exact tar!ets for each division and reduces over)production and under)production

%&pes and si"nificance of contributions

The three types of contributions mentioned in the case are as follows$ *ta"in! example of Bombay poster sub)unit,

1 3 7

Bombay poster9s contribution to local and company overhead and profit Bombay contribution to company9s overhead and profit Total Contribution to company9s overhead and profit

(n sheet 1 mentioned above& we have already established that Bombay and Delhi operations provide different contributions which combine to!ether to form the company contribution The analysis done by the consultant introduces us to individual contributions that each sub)unit ma"es towards the company These are as follows$

,omba( )o$ter ,omba( )aint ,omba( Commercia' 4e'5i )o$ter 4e'5i )aint 4e'5i Commercia'

61804 50110 24344 29734 9865 4040

The above data !ives an indication of which sub)unit features prominently in the scheme of thin!s and sub)units which does not This helps in creatin! a future direction of the company 0ext type of contribution is :Bombay contribution to company9s overhead and profit9 This specifies the most profit !eneratin! location unit across the company .inal contribution type specifies the overall contribution and profit of the company

'

(nal&sis serves t e follo)in" purposes*

1 3 7 Proper division of fixed costs across various sub)units dependin! upon their share of operations in the overall company operations Proper information about the contribution and overheads arisin! out of each sub)unit This will help in determinin! the areas of consolidation and expansion in the company (ndividual brea")even point for each sub)unit helps in determinin! the level of production re%uired in each one of them to ma"e that unit profitable (t helps in weedin! out loss) ma"in! parts of the company Study of P4 ratio and specific fixed costs can help in formin! appropriate strate!ies for future usin! which maximum profit can be !enerated Helps in proportional allocation of expenses across locations and sub)units dependin! on the amount of operations bein! carried out in each one of them This helps in true profit determination

; <

,i-itations
1 3 There mi!ht be some costs which can shift from fixed to variable or vice)versa This analysis is not desi!ned to cater for such scenarios Classifications desi!ned in current analysis does not cater for scenarios that involve buyin! and sellin! of properties