Operate the Distillation Department with existing e Operate the Distillation Department with new equi Do not operate the Distillation Department
EXISTING EQUIPMENT CONTRIBUTION (40-2)*10000-160000-80000+Contribution (40-2)*10000-160000-800 00+Contribution from the best alternativeA/B/C Contribution per unit of roots (basic input) Rs. 14+Contribution alternative B/C Rs. 15 (in case of C) (in case of B) Relevant/ incremental fixed costs Relevant/ incremental fixed costs
48000 (Alternative 72000 (Alternative
BREAK EVEN QUANTITY
3200
NEW EQUIPMENT CONTRIBUTION (40-2)*10000-160000-80000+30000+Contribu (40-2)*10000-160000-8000 0+30000+Contribution tion from the best alternativeA/B/C Contribution per unit of roots (basic input)
Rs. 17+Contribution alternative A/C Rs. 18 (in case of C) (in case of A)
Relevant/ incremental fixed costs
48000 (Alternative
Relevant/ incremental fixed costs
72000 (Alternative
BREAK EVEN QUANTITY
2666.67
Decision Operate Distillation Department with new machine if roots available are mor 2667 Kgs. Do not operate Distillation Department if roots availability is less than 2667 installing the new machine) Operate Distillation Department if roots availability is more than 2667 and le 4444.44 Kgs. And sell the aromatic oil directly in the market.
Final conclusions:
(1) The company should keep on manufacturing Sanjivani as the possible penal
(2) With regards to adoption of the new process developed for the Extraction Department, it would b availability of roots is more than 4444 Kgs. The company should not run the extraction Department i
(3) On similar lines, the firm should continue Distillation Process subject to minimum availability o alternative will be to run the Distillation Department and sell Aromatic Oil directly in the market. Pr
(4) The firms should install the new machine as incremental benefits are more than incremental cost of roots in the case of old machine. Therefore, by installing new machine, the firm can operate the d i
RAJNIGANDH EXTRACTION Old Process New Process
Rs. 40/ml
APNA
Add. Cost (New Process)
EXTRACTION PROCESS
ATIC OIL Rs. .40/ml
quipment ment
Alternative A Alternative B Alternative C
Operate the Extraction Depar Operate the Extraction Depar Do not operate the Extraction EXISTING P
140000 rom best
CONTRIBUTION (12.5-8)*20000-5000-25000-(500*20) Oppurtunity cost of aromatic oil Oppurtunity cost of aromatic oil (per Kg of root)
r Rs. 20.4 Contribution per unit of roots (basic input) Contribution considering opportunity cost C) B)
NEW PR CONTRIBUTION (15-8)*18000-5000-25000-(600*20)-(0.2*100000 Oppurtunity cost of aromatic oil Oppurtunity cost of aromatic oil (per Kg of root) Contribution per unit of roots (basic input) Contribution considering opportunity cost 140000
Given the higher amount of Contribution per unit should be adopted. rom best Break Even Quantity r Rs. 23.4
Relevant fixed cost BEP
C) B)
Decision
FC/CMPU 24000 4444.44
Operate Extraction Department with new process
Do not operate Extraction Department if roots av than
gs. (After
ss than
y for dumping it in the lake could be severe. Given these possibilities, the company sh
e beneficial to adopt the new process as contribution (per kg of roots) is higher for the f the availability of the roots is lower than 4444 Kgs otherwise the firm will run into lo
2667 Kgs. of roots. If the availability of roots is less than 2667 Kgs., the firm should n ocessing of aromatic oil in the extraction Department will be beneficial only if the avail
s. Besides, installing new machine will result into higher level of contribution per kg o stillation Department subject to minimum availability of 2667 Kgs. of roots.
PERFUMERIES PROCESS 20000 mls. 18000 mls.
P=Rs. 12.5/ml P=Rs. 15/ml
Rs. 0.2/ml of aromatic oil
MANORAMA
SANJIVINI RESIDUE ment with existing process ment with new process Department
Dump into Lake
ROCESS 50000 10000 1 5 4
CESS )
64000 10000 1 6.4 5.4
f costrained resource (roots), new process
We have to process Sanjivini as dumpin a permanent solutio more severe penalti Therefore, w contimnue with I's p Rs. 20 per kg of San
if roots available are more than 4444.44 Kgs.
ilability is less than 4444.44 Kgs.
uld not dump residue in the lake.
new process compared to that in the case of old process.Further, the company should run Extraction De sses.
ot run Distillation Department. For availability of roots more than 2667 Kgs. and less than 4444 Kgs., t ability of roots is more than 4444 Kgs.
roots; that will reduce the breakeven quantity for running the Distillation Department to 2667 Kgs of r
Alternative 1 COSTS
Produce Sanjivini Old Process New Process 10000 Kgs 10000 12000 20000 Kgs 20000 24000
Alternative 2 COSTS Rs. 14000
he fibrous residue into residue into the lake is not n. Besides, it can attract s in future. don't have any choice but roduction despite of a loss of ivini.
Dump into the lake Possible severe penalty & CSR
partment only if the
e best possible
oots instead of 3200 Kgs
Incremental Analysis for Purchansing N INITIAL INVESTMENT Incremental Depreciation per year
Incremental Benefits/ PA Incremental profit due to saving in variable cost (Savings= Rs. 30000) Incremental depreciation net of tax savings (20000 - 10000) Net increase in PAT (each year for next five years) Alternative 1
YEAR 0 1 2 3 4 5
DO NOT DISPOSE OFF THE OLD MACHINE (KEEP IT AND DEPR INCREMENTAL PAT 0 5000 5000 5000 5000 5000
Total Cost/ Benefit -100000 25000 25000 25000 25000 25000 25000
SELL THE OLD MACHINE SALE OF MACHINE
Realisable market value Current book value Loss on sale of machine (Short-term Capital Loss) Tax savings on Short-term Capital Loss (Assuming sufficient profit is avaialable to tak
YEAR 0 1 2 3 4 5
TOTAL
INCREMENTAL PAT 0 5000 5000 5000 5000 5000
Incremental Incremental Total Outlay & cash flows/ Cost/ Incremental savings on sale Benefit Depreciation of machine -100000 25000 -75000 20000 -5000 20000 20000 -5000 20000 20000 -5000 20000 20000 -5000 20000 20000 -5000 20000 0 0 25000
It may be noted that in both the alternatives, the final result remains intact. benefits and associated costs. In case we consider time value of money, the to note that the cashflows occurring at different times should not be compa considering appropriate discount factor (cost of capital). The time value of situation.
ew Equipment 100000 20000
15000 10000 5000
CIATE IN NEXT 5 YEARS)
tax benefit of loss)
0 50000 50000 25000
This occurs as we have ignored the time differences that exist between the decision to dispose-off old machine will be preferred. However, it is important ed right away. Therefore, these benefits and costs need to be analysed by oney has been ignored deliberately in order to avoid further complexity of the
