CASE STUDY REPORT ON MEGHA ENTERPRISES

Cost analysis and control

by

MAKRAND KARTHIK HARSHA RAVIKANT

(Roll No.: B060136ME) (Roll No.: B060487CE) (Roll No.: B050302PE) (Roll No.: B060494CE)

NATIONAL INSTITUTE OF TECHNOLOGY CALICUT April 2010

About the organization

Megha Enterprises was established in 1989 by Mr.Anil in the NITC campus. .Now its an organization managing 6 shops and with a work force of about 25 people. The profit earned is close to a lakh per month. The services offered by the organization are 1 2 3 4 5 6 7 8 Digital copying DTP works Color Photostat Offset printing Screen printing Spiral binding Lamination Posters and banners

Manufacturing process
To produce photocopies of an original document, the photocopy machine first makes a temporary image, a sort of negative of the original. Inside the machine is cylinder made of a highly conductive metal, usually aluminum, coated with a photoconductive, often selenium. The surface of the cylinder is electrically charged, and then a bright lamp is passed over the image. The area of the original image that is blank white will reflect light back onto the cylinder, discharging those areas. The result is a sort of electric map of the original image. Some more advanced copiers produce a digital copy of the image and use a laser to charge the cylinder.

The next step is to apply toner to the electrically charged cylinder. Toner is likely powdered ink, and it is attracted to the charged regions, where it sticks. All that remains is to transfer the image to a sheet of paper, where the toner is melted by heat and pressure rollers, and to "erase" the image on the cylinder by exposing its entire surface to light.

The mechanics of a photocopier are modest, but still somewhat complex. The image transfer does not occur at the site where the original image is placed. Instead the drum must be deep within the machine, in complete darkness, until a series of mirrors project the image onto it. A belt moves the photoconductor to the toner and brings it together with the paper. The cylinder is erased by a second set of lights and is made ready to be electrically charged again for a new image.

PRODUCT COST
The methodology used is monthly expenses incurred in various cost components. TOTAL AMOUNT OF PHOTOCOPYING DONE The total amount of photocopying done is calculated based on the number of ink cartridge used in the Machines. Total no of machines = 12 No of ink cartridge used by a single machine = 2 to 10 1 ink cartridge can print 10,000 copies The total no of copies made= (sum of ink cartridges used by all machines) X (copies per ink cartridge). We have shops at different location and the amount of printing done depend on the location of the shop so we have to normalize the amount of cartridge used in each machine at each shop. No of cartridge used per machine in shop at mini canteen, outside library, inside, at cops and 2 shops outside NIT C Campus is taken as 10, 10, 4, 2, and 5 respectively. 2 machines is used per shop. Thus the total number of cartridge used = 2 X (10+10+4+2+5+5) = 72 The total no of photocopies made = 72 X 10,000 = 7,20,000.

ELEMENTS OF COST
We have gathered data on the various costs goes into photocopying. Element of cost i.e. material, labor and overheads are as follows:

1. DIRECT MATERIAL COST The direct materials used in the printing are ink and paper. Paper: A4 size paper is used. Which comes in bundle of 500 pages costing Rs 168 MRP but the wholesale price is Rs 123. So we are taking Rs 123 as price of 500 pages. Since the photocopy is done single side or back to back. We are taking 80% of printing as back to back (as most of the photocopying is taken by students for exam) rest 20% as single side printing (mostly for project reports) So the number of paper used is Back to back = .8 X 7,20,000 /2 = 288000 Single side = .2 X 7,20,000 = 144000 Total A4 paper used = 288000 + 144000 = 432000 Expenses incurred on the 432000 A4 paper = 123 X 4,32,000 / 500 = Rs 1,06,272.

Ink Cartri ge: since number of cartridge will vary according to the number of copies made but the number of paper a single cartridge can produce is such a large number we can take it as constant. Price of a single ink cartridge = Rs 900 (one ink cartridge contain one kg of ink) The total number of cartridge used = 72 Expenses incurred on the cartridge = 900 X 72 = Rs 64800

2. DIRECT LABOR COSTS The remuneration paid to the employee is monthly based. The total numbers of employees are 25. Remuneration per month per employee is Rs 3,000 Expenses incurred on the remunerations of monthly paid employees are Rs 75,000.

3. FIXED OVERHEADS EXPENSES Rent: the rent per shop is 6,000. The 5 shops are rented and 1 shop is owned Expenses incurred on the rent of the shops = 5 X 6000 = 30,000 Inventory in stock: generally most of the industries take inventory as fixed overhead. Expenses incurred on the inventory are of Rs 25,000.

4. VARIABLE OVERHEADS EXPENSES Electricity bill: Expenses incurred on the electricity bill is Rs 8000 Transportation cost: Expenses incurred on the transportation is Rs 4,000 Telephone cost: Expenses incurred on the telephone is Rs 1500 Repair and maintenance: Expenses incurred on the repair and maintenance is Rs 5,000.

BREAK EVEN ANALYSIS

The selling price of one photocopy is 50 paisa. The loss of paper is 10% The total photocopy sold= .9 X 7,20,000 = 6,48,000 Sales revenue =.8 X 6,48,000 X .50 + .2 X 648000 X 1 = 3,88,800 Marginal contribution = 388800-264572=124228 P/V ratio = 124228/388800=31.952% Net profit = (388800-172133.20) X 31.952/100 = Rs 69229.38

Desired sale volume in Rs= 55000/31.952 X 100=172133.20 Desired sale volume in number of print = 172133.20 / (.8 X .50 + .2 X 1) = 286889

Summary
Direct Material Cost Paper Ink Cartridge Remuneration Electricity Bill Transportation Telephone Repair & Maintenance Total Variable Cost Fixed Overhead Cost Rent Inventory 30000 25000 8000 4000 1500 5000 (in Rs) 106272 64800 171072

Direct Labour Cost Variable Overhead Cost

75000 18500

264572 55000

Sale Revenue Net Profit Desired Sale Volume In Rs In Number Of Print

388800 69229 172133.2 286889

OBSERVATION
y y

y y y

The values take above are not exact. The real value may deviate but not to that extend to cause complete inaccurate calculations. Number of paper printed is taken according to cartridge not on the paper used because the paper is also sold as it is. Which can create deviation in calculation as the exact ratio is not know because no account is kept of it. Not much information was available about the shops outside the NITC Campus As the photocopying is not the only Services provided by the photocopy center. We have neglected profits gained and costs incurred. I will call this business as controlled chaos. This system is build over time and it works well as shown by calculations the profit is good. The profit will increase further if other services are considered. We have not included the depreciation of machines and computers used in the shops.

SUGGESTION
REPERCUSSIONS OF INCREASING THE SELLING PRICE
Now we are trying to analysis repercussions of increasing the selling price. Let us consider a scenario If we increase the selling price by 100 % i.e. Rs 1 per copy what change in profit will occur. We are keeping 1 Rs because it is next practical value. First we have to explain the increase in the selling which can be done by adding one additional copying machine near the library and at mini canteen shop. This will provide the service much faster and also we have a contributing factor - inflation. We have to buy 2 machines. We have to hire 2 additional employee remuneration cost Rs 6,000. Employees may also ask for increase in remuneration let it be 10 % increase. The rent may also increase by 10%. Before calculating increase in cartridge cost we have to include the drop in sale volume. Since the alternatives are at near hostel office and at Kattangal. Kattangal shop is already charging 1 Rs so we are neglecting it. Near hostel office shop has 2 machines which cannot handle volume of such proportion and even he may get tempted to increase the price. We are considering that competitors have kept prices as it is. So let suppose the volume transferred to competitor is 20 %. And people will become more conscious while taking photocopy so the volume of photocopy taken will decrease. Let suppose it be 10%. We should not be concerned about the volume dip because the increase in number of students per year in subsequent year is almost equal to 30-40 %. But still we are considering the decrease in volume. Even though volume of sale is decreasing we are still keeping the number of cartridge used same and also we are keeping the other costs also same. The risks involved are enormous. So the profit must increase by more than 40% then only this risk is justified. In future price rise is inevitable. So its justified to review the price now. Now after considering all the values we see that the increase in profit is 335%. Even a decrease in volume by 70 % will give the profit earned with the old selling price This is farfetched scenario. This will definitely counter student dismissal. Our suggestion will be that increase in selling price is not unfavorable. The practical change will be to Rs 1. The question to answer is when to implement these changes. The timing will be the crucial factor.

Summary of costs with new selling price

Direct Material Cost Paper Ink Cartridge Remuneration Electricity Bill Transportation Telephone Repair & Maintenance Total Variable Cost Fixed Overhead Cost Rent Inventory 33000 25000 8000 4000 1500 5000 (in Rs) 74390 64800 139190

Direct Labour Cost Variable Overhead Cost

89100 18500

246790 58000

Sale Revenue Net Profit Desired Sale Volume In Rs In Number Of Print

604800 300010 97982 81651