Financial Management

04 Jul

CASE – 1   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

 1. How profitable are its operations? What are the trends in it? How has growth affected the profitability of the company?

2. What factors have contributed to the operating performance of Greaves Limited? What is the role of profitability margin, asset utilisation, and non-operating income?

3. 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 – 2   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 – 3   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:

  1. Works office costs on the basis of direct labour hours.
  2. Maintenance costs on the basis of book value of plant and machinery.
  3. 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:

1. 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.

2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.

3. Do you agree with:

  1. The procedure adopted by the company for the distribution of overhead costs?
  2. The choice of the base for overhead absorption, i.e. labour-hour rate?

Exhibit A

STAR ENGINEERING COMPANY

Actual Expenses(Manufacturing Overheads) for April

  RS RS
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

Exhibit B

STAR ENGINEERING COMPANY

Projected Operation Data for the Year

Department Area

(sq.m)

Original Book of Plant & Machinery

Rs

Direct Materials

Budget

 

Rs

Horse

Power

Rating

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

Departments

Overhead Costs

Production Departments Service Departments Total Amount Actuals for April (Rs) Basis for Distribution
             
A. Allocation of Overhead to all departments

A.1 Indirect Labour and Supervision

               

 

 

1,49,700

 
A.2 Indirect materials and supplies                

12,800

 
A.3 Factory Rent               1,68,000  
A.4 Depreciation of Plant and Machinery                

44,000

 
A.5 Building Rates and Taxes

 

               

2,400

 

 
A.6 Welfare Expenses

 

               

19,494

 
    A.7 Power                 68,586  
A.8 Works Office Salaries and Expenses                

1,30,260

 

 

 

A.9 Miscellaneous Stores Expenses

               

1,190

 
A. Total (A.1 to A.9)               5,96,430  
B. Reallocation of Service Departments Costs to Production Departments                  
B.1 Distribution of Works Office Costs                  
B.2 Distribution of Maintenance Department’s Costs                  
B.3 Distribution of Stores Department’s Costs                  
Total Charged to Producing

C. Departments (A+B)

               

 

5,96,430

 
D. Labour Hours Actuals for April  

1,20,000

 

44,000

 

60,000

 

27,500

         
E. Overhead Rate/Per Hour (D)                  

 

CASE 4: 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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