Cost Analysis of DMR Enterprises Ltd

Riddhi Goel Rajesh Sheth

Drabir Ghosh Nemish Mehta

Manik Garg Sushant Raj

Cost Analysis of DMR Enterprises Ltd. Group – 9

Table of Contents I.

Executive Summary...........................2

II.

Problem Statement...........................2

III.

Criteria for decision making.............3

IV.

Assumptions and Constraints...........3

V.

Strategic choices and Cost Analysis..

VI. !eccomendations.............................." VII. Appendix...........................................#

Executive Summary

Business summar! DMR enterprises "td #DMR$ is an importer and distributor o% beaut supplies %or &anadian Retailers 'hi(h o)ers *+ produ(ts among three major produ(t lines. ,urpose! -o anale the e)e(t o% di)erent (ost stru(tures %or the (ompan. Methodolog! Sensiti/it analsis and Indi)eren(e ,oint &al(ulation. 0indings! 0or the same sales 1gures the net in(ome %or the (urrent s(enario is higher than the net in(ome o% the se(ond s(enario 'here the sales (ommission is 2.34 'ith a 15ed selling e5pense o% 678+++8+++. Re(ommendations! I% the (ompan is planning not to in(rease their sales /olume then the should (ontinue 'ith their present operations and in(rease the (ommissions on sales. But i% the (ompan is seeking e5pansion8 (apitaliing on large 15ed (ost 'ill in(rease bottom line b leaps and bounds.

&ost analsis o% an (ompan is done keeping in mind the (ost obje(t o% the said (on(ern. s there are /arious %a(tors a)e(ting (ost 'hi(h (an be segregated in man di)erent bu(kets depending on 'a the are treated8 (ost stru(ture analsis in/ol/es segregating (ost in di)erent dimensions. -he o/erall as 'ell as indi/idual impa(t o% (osts should be analed %or better pi(ture o% the o/erall (ompan.  (ost analsis pro/ides an opportunit to judge the e)i(ien( o% initiati/es.  (ost analsis (an tra(k e5penses and spending8 'hi(h (an help a (ompan determine i% %unds are misappropriated or not.

COST AAL!S"S O# DMR ETER$R"SES LTD. %

&

$roblem Statement

DMR :nterprises "td. #DMR$ is a small importer and distributor o% beaut supplies8 and has e5perien(ed moderate su((ess. -he president o% the (ompan8 ;aren Van Brundt8 re(entl re(ei/ed a phone (all %rom Summit Sales and Marketing In(.8 #the (ompan.34 o% sales. similar (ompanies are paing their o'n sales %or(es a (ommission rate o% 2.34. ?o'e/er 15ed selling e5penses 'ould go up 678+++8+++ to (o/er sales salaries8 automobile e5penses8 tra/el8 and training (osts.

In

addition8 DMR 'ould sa/e 6338+++ per ear on 'ork.

Criteria for decision ma'in(

Se/eral (riteria has been obser/ed to make a 1nal de(ision %or the (ompan. -hese are the %ollo'ing

a$ b$ ($ d$

Net ,ro1ts &hange o% bottom line on (hange o% Sales ,er(entage o% 0i5ed &ost in(urred b the (ompan in both the (ases 0uture s(ope o% gro'th in both the (ases

Assumptions and Constraints

nalsis is al'as based on (ertain assumptions and (onstraints and in this %rame'ork8 de(ision are taken8 keeping in mind the limitation o% opinions.

a$ @e also assume that interest 1gures 'ill not (hange in spite o% (ompan o((urring hea/ 0i5ed e5penses b$ Sin(e8 /ariable (ost per unit is not gi/en8 indi)eren(e re/enue le/el is (al(ulated instead o% /olume le/el. ($ Sensiti/it nalsis has been done 'ith limited number o% /ariables COST AAL!S"S O# DMR ETER$R"SES LTD. %

)

d$ "a(k o% /olume data has t'eaked the (al(ulation o% Indi)eren(e point e$ @e ha/e assumed that in(ase o% in house sales team8 sale le/el o% re/enue (an be maintained.


*

Strate(ic c+oices and Cost Analysis.

0irstl 'e segregate our di)erent (ost in di)erent bu(kets on the basis o% the (ost obje(t. -aking our (ost obje(t to be the goods imported and distributed b the (ompan 8 the manu%a(turing 15ed and /ariable (ost remains the same n both the s(enarios and 'ill ha/e no impa(t on the Selling and dministrati/e (osts .

S(enario *

&ommissions are deemed to be dire(t and /ariable as it (an be easil tra(eable to a parti(ular produ(t as *>.34 o% the sales amount as the (ost. -his 'ill also /ar dire(tl in proportion to the /olume o% units sold. A74 o% the total Selling and dministration (ost is /ariable and dire(t.

Marketing and dministration (ost are 15ed and indire(t and %orms a relati/el smaller portion o% the o/erall (ost as (ompared to the abo/e /ariable (ost. A4 o% this (ost is 15ed8 a small portion (ompared to the /ariable (ounterpart. -his also %o(uses on the %a(t that as /olumes rise8 the /ariable (omponent being high8 and the (ost ad/antage on large s(ale mo/ement o% goods 'ill be %ar less than 'hat should ha/e been in the ideal situation.

nother important aspe(t o% this option is the steep hike demanded b the e5ternal marketing 1rm 'ill gi/e it a greater bargaining po'er in the long run. s per the resear(h that standard (ommission in the market is 2.34 COST AAL!S"S O# DMR ETER$R"SES LTD. %

,

'hereb the (ompan is alread gi/ing *=.34 'hi(h is 74 higher than the industr standards. In(reasing the (ommissions to *>.34 'ould be more than *++4 o% the norm 'hi(h 'ill be /er di)i(ult to a((ept %or an business. Bearing this (ost 'ill ha/e a signi1(ant impa(t on our bottom line and as per the estimates (al(ulates 8 it should dip b (lose to 4. -his kind o% (ost (annot be passed on to the (onsumers as 'ell8 as it 'ill make our produ(t highl un(ompetiti/e in the market.

S(enario =

-aking all /ariables as same as in the pre/ious (ase8 this option e5plores the possibilit o% de/eloping its o'n sales %or(e rather than outsour(ing it to e5ternal third part. -his in/ol/es in(urring huge 15ed (ost to the tune o% Rs 7+8 ++8+++. Cn the bene1t side our (ommissions drops %rom (urrent *=.34 and the demanded *>.34 to 2.34 onl. @e are sa/ing a part o% our %unds in auditing (ost to the tune o% Rs 338+++.

Going b the idea8 this seems a %ar (redible option but it (omes 'ith its o'n risk %a(tors. -he 15ed (ost (omponent o% the Selling and dministration &ost has steep in(line %rom A4 in the pre/ious (ase to (lose to >34 in this (ase. Nonetheless this s(enario (reates huge (apa(it %or the 1rm to le/erage o% 15ed (ost and in(rease its sales /olume.

&onsideration in/ol/es that as this is a relati/el small (ompan presentl 'ith moderate su((ess8 in(reasing the /olumes b su(h mammoth 1gures is


-

possible or not. It is long term strategi( de(ision that has to be taken keeping in mind the %uture goals and mission o% the (ompan.

Cn doing the sensiti/it analsis 8 'e see that 'hen the sales are in(reased and de(reased b 3+4 8 the impa(t on bottom line is mu(h larger in (ase o% s(enario = 'here the (ompan (reates its o'n in house sales team. Net pro1t jumps %rom b 7234 (ompared to onl *234 in (ase o% s(enario * 'here the (ompan agrees on pro/iding *>.34 sales (ommission to its e5ternal marketing agen(.

Cn the other hand 'hen sales are de(reased b 3+48 impa(t on latter (ourse o% a(tion is %ar greater than the 1rst one. Net ,ro1t dips b A34 (ompared to ==4 in option * . -hese 1gures sho'(ases that the se(ond s(enario is %ar more risk approa(h %or the (ompan than the 1rst one. -he (ompan is able to take ad/antage o% huge 15ed (ost to in(rease (apa(it8 adding le/erage to its high /olume o% produ(tion. &apitaliing on this 15ed (ost is onl sustainable 'hen the sales /olume in(reases b leaps and bounds. Similarl 'hen the sales /olume de(line8 the (ompan bears the brunt o% ser/ing its huge 15ed (ost 'ithout getting the ad/antage o% e(onomies o% s(ale. In s(enario * 8 the (ommissions (hange dire(tl in proportion to sale along 'ith absen(e o% huge 15ed (ost 8 gi/es a more (onser/ati/e approa(h to (osting.

Iindi)eren(e ,oint




@e ha/e (al(ulated the indi)eren(e point %or the (ompan keeping s(enario * as (onstant 'here the (ompan should be indi)erent to both the options. s per (al(ulations8 sales 'ould ha/e to in(rease moderatel b *=.=4 in s(enario = to a(hie/e the same le/el o% net pro1ts as in the (ase s(enario *.

/ey #indin(s

et $ro0t C+an(e in et $ro0t 1+en Sales increase by ,23 C+an(e in et $ro0t 1+en Sales decrease by ,23 Sales neede to ac+iece et "ncome Rrs 4),22 3 of #ixed Cost as part of Sellin( and Administrative Cost


5

Reccomendations

-here are = path'as 'hi(h the (ompan (an adopt keeping in mind the long term strateg and goals .

*. -he (ompan should (ontinue 'ith the e5ternal marketing agen( and in(rease the sales (ommission to *>.34 'here the are no long term plan %or %uture e5pansion 8 del/ing into ne' produ(t lines and markets . -his 'ill be the most %easible a(tion as it
=. -he se(ond approa(h is to opt %or s(enario = in (ase the (ompan plans to in(rease its (apa(it to a /er large e5tent as to take bene1t o% the huge 15ed (ost. 0i5ed (ots in(reases (apa(it and hen(e higher /olumes 'ill bring in better (osting to the (ompan in terms o% lo'er (ommissions. -he le/erage o% high 15ed (ost in onl e5ploitable at higher sales /olume /ia in(reasing produ(t lines and produ(ts 'ithin


4

ea(h produ(t line 8 building a strong sales %or(e and e5panding in ne' markets .


62

Appendix Scenario 6 Particulars Sales Manufacturin( Costs 8ariable #ixed Gross Margin Sales Selling and Administrative Manufacturin( Costs Cost Commissions 8ariable ; 8ariable and #ixedDirect9 #ixed Mar'etin( ; #ixed and Grosscost Margin "ndirect9 #ixed Administration Selling and Cost ;#ixed and Administrative "ndirect9 Cost Commissions

Normal Sales &,27227 222

Sales decrese Sales increased by 50% by 50% 6&,7227 ),222 222 22

4272272 22 ,272272 22

*,2222 6),222 2 22 6*27227 ,272272 4,72272 ,272272 65,222 222 22 22 22 Scenario &22 6627227 )272272 6427227 Normal Sales Sales decrease by 222 22 by Sales increased 222 50% 50% &,2722722 6&,722722 ),2222 2 2 2

42722722 *),222 2 ,2722722 2 ,722722 2

*,22222 6),2222 &65,2 -,-&,2 2 2 2 6*2722722 ,2722722 4,7227222 ,2722722 2 2 2 ,722722 ,722722 662722722 )27227222 2 2 2

&272272 -5,22 22 2 &6&,222

&272272 *-5,2 22 2 624),2

&272272 42-&,2 22 2 )65,22

#ixed Mar'etin( cost

,7227222

#ixed Administration Cost % savin(s9 #ixedOperatin( Sales Cost"ncome

% 647*,722 647*,722 647*,722 447)7, 2 *67&,72 26-757, 2 22 22 *2722722 5,2222 *2722722 ,)5,2 *2722722 224-)&,22 % 2 2 2 6272272 6272272 6272272 22 22 22 &*7)27222 % 4)7-7,22 % *,7)57,2 )67&,72 &-757, 547)7, 627227222 % 627227222 22 22 22 627227222 &-56&, 6*7)27222 % 5)7-7,22 4),22 2 ,,7)57,2 *&4222 &,7627&,2 21,87,5 26,87,5 62,56,2 00 00 50 10,01,00 58,57,25 0 55,38,75 0 0

"nterest Expense Operatin( "ncome Eearnin( :efore "nterest Expense Taxes Eearnin( :efore Taxes "ncome Taxes "ncome Taxes et "ncome et "ncome


,7227222

642722722 2

66

,7227222


6&

Indierence !ur"e

ective ? To 0nd out at 1+at level of Sales 1ill t+e company ac+ieve same $ro0ts level as scenario 6

#ssum$tions 
427227222

Sales

&,27227222

3 basis

)-3

)-3 of sales 1ill al1ays comprise of 8ariable Cost as it 1ill increase in proportion to t+e Sale . Operatin( "ncome B Sales %; 8ariable Cost  #ixed Cost9  % ;Commissions  #ixed Addministration Cost  #ixed Sellin( Cost  #ixed Mar'etin( Cost *67&,7222 B  % ; .)-  ,272272229  % ;.25,  647*,7222  ,7227222  *272272229 

B

2805&05&

'ence , to ac(ie"e t(e same le"el o) net income , t(e com$any *ould (a"e to (a"e a re"enue o) +s 28,5&,05&  #t t(is le"el t(e com$any *ould be indierent in terms on Net Income


6)

Cost Analysis of DMR Enterprises Ltd

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