VARUN NAGAR AGRICULTURAL COOPERATIVE SOCIETY (VNACS)

Situation:

VNACS grew 5 times in size within 15 years. It aims to retain the trust of the members and the good
image it has in the society which helped in ensuring support from bank as well. Now the society has a
cash balance of Rs. 5 lakhs in mid-March 1991, an overdraft of Rs. 5 lakhs taken in September 1990 and
a payment of 5 lakh to the members for procurement of 100 tons of paddy bags.

Problem:

Mr. Sharma, one of the board members of VNACS committee suggested to store paddy for next 6
months to get better returns. On March 21, 1991 National Fertilizer Corporation has offered 2000 bags
of fertilizer at a special price of Rs. 250 per bag whose delivery needs to be accepted within two weeks
and bank manager has agreed to allow the society to the use of overdraft at an annual interest rate of
10% if required. Mr. Agrawal, manager of VNACS needs to do what is best for the members of society

Options:

 Sell paddy, clear the overdraft and decline fertilizers offer

 Sell paddy, use overdraft/cash balance to buy fertilizers
 Store Paddy and decline fertilizers offer

Constraints:

 Limited resources/ funds

 Pay off the members before March 31, 1991

Criteria for Evaluation:

 Payment of Rs. 5 lakhs to members before March 31, 1991

 Members of the society entrusted the sale of the crop with society for good sale and believe it's
best to sell outputs together or buy inputs together
 Not lose good image or support of bank

Assumption

Over draft interest rate charges are applicable starting from March 1991

Expenses or insurance to store fertilizer or paddy can be paid after six months
Evaluation of Options

 Sell paddy, clear the overdraft and decline fertilizers offer

o Members of the society are paid Rs. 5lakhs by selling 100 bags of paddy at Rs. 5000 per
ton before March 31, 1991 ensuring their trust is kept
o Bank overdraft of Rs. 5 lakhs which was drawn in September 1990 is cleared using the
cash balance at hand ensuring bank support and image is maintained
o Fertilizers special discount offer is declined as there is no money left at hand

This option leads to no surplus, members are paid on time and neither offer from bank nor fertilizer
company is used

 Sell paddy, use overdraft/cash balance to buy fertilizers

o Members of the society are paid Rs. 5 lakhs by selling 100 bags of paddy at Rs. 5000 per
ton before March 31, 1991 ensuring their trust is kept
o Use the cash balance to buy 2000 bags of fertilizers with delivery in next two weeks and
not clear the overdraft for next six months.

Amount saved by buying 2000 bags of fertilizers in March and 100 more in October is Rs 7, 000. (Refer to
exhibit 1)

 Store Paddy and decline fertilizers offer

o Cash balance of Rs. 5 lakh is paid to members of the society before March 31, 1991
ensuring their trust is kept
o Paddy is stored in the society storage for six months and sold in October, later overdraft
is cleared using the sale money along with the interest and insurance
o Fertilizers special discount offer is declined as there is no money left at hand

Surplus amount that will be accumulated through this solution is Rs. 85,0000 (Refer to exhibit 2)

Optimal Solution

Mr. Agrawal should go with the third option as it saves maximum amount for members of society and
bank is also kept happy by returning the overdraft with interest.
Exhibits

EXHIBIT 1: Calculation of amount saved by accepting the offer from National Fertilizer corporation

March October
Cost of 2000 bags 500000 600000
Cost of storage at Rs. 500 per 3,000 -
month
Cost of labor and equipment 25000 -
Insurance for six months 10000 -
Interest on overdraft at 10% for 25000 -
6 months
5% of the stock is lost due to 30000 -
storage which will be purchased
in October at @300 per bag to
meet the annual requirement
Total cost of 2000 fertilizer bags 593000 600000
in October

EXHIBIT 2: Calculation of surplus amount after sale of paddy in October

100 tons of paddy sold at least sale price - Rs. 620000

6200/ton in October
Insurance for six months -10000
Interest on overdraft at 10% for 6 months -25000
Cost of procurement of 100 tons of paddy bags in -500000
March
Surplus amount after sale of paddy 85000