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) |
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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) |
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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 |
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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:
- Works office costs on the basis of direct labour hours.
- Maintenance costs on the basis of book value of plant and machinery.
- 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:
- The procedure adopted by the company for the distribution of overhead costs?
- 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 | 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
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 |
Exhibit B
STAR ENGINEERING COMPANY
Projected Operation Data for the Year |
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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 |
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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 |
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A.2 Indirect materials and supplies |
12,800 |
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A.3 Factory Rent | 1,68,000 | ||||||||||
A.4 Depreciation of Plant and Machinery |
44,000 |
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A.5 Building Rates and Taxes
|
2,400
|
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A.6 Welfare Expenses
|
19,494 |
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A.7 Power | 68,586 | ||||||||||
A.8 Works Office Salaries and Expenses |
1,30,260 |
|
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A.9 Miscellaneous Stores Expenses |
1,190 |
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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 |
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D. Labour Hours Actuals for April |
1,20,000 |
44,000 |
60,000 |
27,500 |
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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?