Current Situation Direct Expenses Materials Manpower Dept O/Hs Manager's Salary Rent Depreciation of Equip Maintenance of Equip

Other Expenses Gen Admin O/Hs Total Packages Limited Quotation Supply of New Packages Annual Rate No. of Packages Contract Term Maintenance Work Annual Rate Contract Term

70,000 50,000 8,000 4,500 15,000 3,600 15,750 22,500 189,350

1,25,000 10,000 5 Years 37,500 5 Years Afterwards to be renewable from year to year Afterwards to be renewable from year to year

As the decision is for the future, need additional details to find out the future/Relevant Cost to compare the proposal of Packages Limited Additional Information Required: Breakup of packages production and maintenance on packages Current Inventory Levels What will happen with workers?

Alternative 1 Outsource Both Supply & Maintenance of Packages

Cost Object Materials Labour (Pension) Labour (Quality Control) Manager's Salary Rent M/c Depreciation Maintenance Other Expenses Gen Admin O/H Interest Earned Annual Charge of Supply of Packages Annual Charge of Maintenance Total Year1 7,500 3,500 (4,000) (10,000) Year2 7,500 3,675 (4,200) (11,000) Year3 7,500 3,859 (4,410) (12,100) Year4 7,500 4,052 (4,631) (13,310) Year5 7,500 4,254 (4,862) (14,641)

125,000 37,500 159,500

125,000 37,500 158,475

125,000 37,500 157,349

125,000 37,500 156,111

125,000 37,500 154,751

Alternative 2 Only Outsource Supply of Packages, In-house Maintenance

Cost Object Materials (PHZ) Year1 1,600 Year2 1,600 Year3 1,600 Year4 1,600 Year5 1,600

Materials (Others)

5,000

5,250

5,513

5,788

6,078

Labour (Regular) Labour (Quality Control) Manager's Salary Rent M/c Depreciation Maintenance Other Expenses Gen Admin O/H

10,000 3,500 5,000 4,500 6,500 -

10,500 3,675 5,250 4,725 6,825 -

11,025 3,859 5,513 4,961 7,166 -

11,576 4,052 5,788 5,209 7,525 -

12,155 4,254 6,078 5,470 7,901 -

Interest Earned

(9,000)

(9,900)

(10,890)

(11,979)

(13,177)

Annual Charge of Supply of Packages

125,000

125,000 152,925

125,000 153,746

125,000 154,559

125,000 155,358

Annual Charge of Maintenance Total 152,100

Alternative 3 Only Outsource Maintenance on Packages

Cost Object Year1 Year2 Year3 Year4 Year5

Materials (PHZ)

14,400

14,400

14,400

14,400

20,400

Materials (Others)

45,000

47,250

49,613

52,093

54,698

Labour Manager's Salary Rent M/c Depreciation Maintenance Other Expenses Gen Admin O/H Interest Earned Annual Charge of Supply of Packages

40,000 8,000 4,500 5,000 3,600 9,250 -

42,000 8,400 4,725 5,000 3,600 9,713 37,500 172,588

44,100 8,820 4,961 5,000 3,600 10,198 37,500 178,192

46,305 9,261 5,209 5,000 3,600 10,708 37,500 184,076

48,620 9,724 5,470 3,600 11,243 37,500 191,255

Annual Charge of 37,500 Maintenance Total 167,250

Alternative 4 Do not outsource at all

Cost Object Year1 Year2 Year3 Year4 Year5

Materials (PHZ)

16,000

16,000

16,000

16,000

28,000

Materials (Others) Labour Manager's Salary Rent M/c Depreciation Maintenance Other Expenses Gen Admin O/H Interest Earned Annual Charge of Supply of Packages

50,000 50,000 8,000 4,500 5,000 3,600 15,750 -

52,500 52,500 8,400 4,725 5,000 3,600 16,538 159,263

55,125 55,125 8,820 4,961 5,000 3,600 17,364 165,996

57,881 57,881 9,261 5,209 5,000 3,600 18,233 173,065

60,775 60,775 9,724 5,470 3,600 19,144 187,489

Annual Charge of Maintenance Total 152,850

Remarks Pension of FIVE senior workers. For example, Walters and Hary. Assuming that there will be an additional employee required for inspection and quality control costing Rs 3,500/year at start of Year 1 with annual increment of 5% every year Overhead rent in the beginning was 4500 and rent saved for Year1 is 8500. So, net rent saved for Year1 was -4000 (4500-8500). Also, assuming rent gets increased by 5% every year, net rent saving will vary as shown.

Interest earned @ yearly compounded rate of interest of 10% on investement of money earned by selling Machine (20,000) and PHZ (80,000=500*160). Bharat Polyplex convinced Packages Limited to buy 160 tonnes of PHZ @ Rs 500/ton. Assuming that Packages used equals 10,000.

786,186

Remarks Amount of PHZ used every year is 1,600 = 4*400(As 400 is the realisable unit price). Assuming same quantity of 4 tonnes of PHZ is used every year and Bharat Polyplex kept 20 tonnes of PHZ with themselves and sold remaining to Packages Limited Assuming same quanity of materials will be used for next 5 years. 10% of total (70,000-20,000) is used for maintenance. So, for first year other materials used will be 5,000. Assuming cost of other materials increase by 5% every year.

Only one fifth of workers are required for maintenance. Also assuming that manpower costs increase by 5% every year Assuming that there will be an additional employee required for inspection and quality control costing Rs 3,500/year at start of Year 1 with annual increment of 5% every year 8000-3000 (Saving by handing over supervision to foreman). Also assuming that salary gets incremented by 5% each year No space savings. Also assuming that rent gets increased by 5% every year

Assuming that other expenses gets increased by 5% every year Interest earned @ yearly compounded rate of interest of 10% on investement of money earned by selling Machine (20,000) and PHZ (70,000=500*140). Bharat Polyplex convinced Packages Limited to buy 140 tonnes of PHZ @ Rs 500/ton and decided to keep 20 tonnes of PHZ with themselves for maintenance for next 5 years at the consumption rate of 4 tonnes/year (10% of total material) for maintenance.

768,688

Remarks

For first year, quantity of PHZ used=36 tonnes (10% was used for maintenance; which has been outsourced) Amount of PHZ used is 14,400 = 36*400(As 400 is the realisable unit price). 160 tonnes of PHZ is lying in stock (already purchased) at the beginning of Year1. Rate of consumption of PHZ is 36 tonnes / year. So, current stock can fulfil next 4 years of PHZ requirement and partially of 5th year. 16 tonnes will be available for 5th year. 20 tonnes will need to be purchased for 5th year. Also, 4 years ago, PHZ costed 500/unit and now it costs 600/unit; an increase of 100/unit in 4 years which means 25/unit in a year, which means 5% increase every year. Extrapolating this, the cost of PHZ for 5th year in future will be 700. Quanity of materials used will be 90% of total used (10% was used for maintenance; which has been outsourced) So, for first year, amount of other materials used is 45000 (.9*50000). Assuming same quantity of other materials is used for next five years and cost of other materials increase by 5% every year. Assuming 4/5th of manpower is used for new packages as 1/5th is used for maintenance. Keeping oldest workers. Also assuming that manpower costs increase by 5% every year Assuming that manager's salary increase by 5% every year Assuming rent increases by 5% every year Saleable price of machine is 20,000 and life remaining is 4 years. So the value of machine used every year is 5,000. Also assuming that the same machine can be used for 5th year Other expenses for new packages for first year will be 9250 = 15750-6500 (As expenses for maintenance are 6500; which is being outsourced) Also assuming that other expenses gets increased by 5% every year

893,361

Remarks For first year, assuming same quantity of 40 tonnes of PHZ is used. Amount of PHZ used is 16,000 = 40*400(As 400 is the realisable unit price). 160 tonnes of PHZ is lying in stock (already purchased) at the beginning of Year1. Rate of consumption of PHZ is 40 tonnes / year. So, current stock can fulfil next 4 years of PHZ requirement. 4 years ago, PHZ costed 500/unit and now it costs 600/unit; an increase of 100/unit in 4 years which means 25/unit in a year, which means 5% increase every year. Extrapolating this, the cost of PHZ for 5th year in future will be 700. Same quantity of other materials are used. Also assuming that cost of materials increase by 5% every year. Assuming that manpower costs increase by 5% every year Assuming that manpower costs increase by 5% every year Assuming rent increases by 5% every year Saleable price of machine is 20,000 and life remaining is 4 years. So the value of machine used every year is 5,000. Also assuming that the same machine can be used for 5th year Assuming that other expenses increase by 5% every year

838,662

No.

Alternative Outsource Both Supply & 1 Maintenance of Packages 2 Only Outsource Supply of Packages Only Outsource Maintenance on Packages 4 Do not outsource at all 3

Year 1

Year 2

Year 3

Year 4

159,500 158,475 157,349 156,111 152,100 152,925 153,746 154,559 167,250 172,588 178,192 184,076 152,850 159,263 165,996 173,065

Year 5

Total

154,751 786,186 155,358 768,688 191,255 893,361 187,489 838,662