Kanpur Confectioneries - Current Profitability

Sales
Conversion Fees
Variable costs:
Maida - 750x120x500/50
Vansapathi - 150x120x520/15
Sugar - 200x120x1200/100
Preservatives & packing
Casual labour
Total Variable Costs
Contribution
Fixed costs at Company Level:
Wages
Interest
Others
Profit/loss

<--------Own--------->
Per ton
Total
18100
2172000

<-----Pearson------>
Per ton
Total

Total

3000

150000

2172000
150000

7500
5200
2400
1000
300
16400

900000
624000
288000
120000
36000
1968000

300
300

15000
15000

1983000

1700

204000

2700

135000

339000

275000
10000
60000

275000
10000
60000

-141000

-6000

A One

Kanpur Confectioneries - Profitability Analysis after accepting

APL offer
The profitability would depend upon (1) reaction from Pearson and
(2) material cost eficiency in line with APL
(1) Pearson may continue with Rs. 3000/ton conversion fees, may negotiate and reduce it to
Rs. 1500/ton as offered by APL or may discontinue the business with KCPL
(i) Contribution @ Rs. 3000/ton = Rs. 2700
(ii) Contribution @ Rs. 1500/ton = Rs. 1200
(iii) Contribution if discontinued = Rs. 0
(2) APL would reimburse material expenses as per its norms and in short run,
KCPL may not achieve the material cost efficiency. This efficiency arises due to productivity improvement
and lower purchase price of inputs. KCPL may achieve only productivity improvement or both.
Further, we should consider improved cost efficiency benefits only on KCPL's
own quantity because any gain on Pearson quantity should be passed on to them as KCPL eithical company.
Material Cost Difference per ton between KCPL and APL

KCPL
productivity
& costs
Maida
Vansapathi
Sugar
Preservatives & packing

APL
productivity
APL
but KCPL productivity
costs & APLcosts

7500
5200
2400
1000
16100

7000
4853
2280
1000
15133

6860
4667
2185
1000
14712 Volume =

Thus, multiple scenarios get developed as follows:

(a) Pearson at Rs. 3, and, without cost efficiency
(b) Pearson at Rs. 3, and, with productivity improvement but KCPL costs
(c) Pearson at Rs. 3, and, with productivity improvement and APL costs
(d) Pearson at Rs. 1.50, and, without cost efficiency
(e) Pearson at Rs. 1.50, and, with productivity improvement but KCPL costs
(f) Pearson at Rs. 1.50, and, with productivity improvement and APL costs
(g) Pearson withdraws,and, without cost efficiency
(h) Pearson at Rs. 1.50, and, with productivity improvement but KCPL costs
(i) Pearson at Rs. 1.50, and, with productivity improvement and APL costs

70

Scenario-wise Profitability Analysis

Contribution from own sales

Contribution from Pearson
Sub-Total
Fixed costs at company level
Profit/Loss (A)
Impact of APL Offer:
Conversion fees @ 1500
Less: Cost inefficiency
Add: Cost efficiency on own
production of 120 tons
Less: Casual labour @ 300
Net impact of APL offer (B)
Final Profit/loss (A+B)

(a)
204000
135000
339000
345000
-6000

(b)
204000
135000
339000
345000
-6000

(c)
204000
135000
339000
345000
-6000

(d)
204000
60000
264000
345000
-81000

(e)
204000
60000
264000
345000
-81000

(f)
(g)
(h)
(i)
204000 204000 204000 204000
60000
0
0
0
264000 204000 204000 204000
345000 345000 345000 345000
-81000 -141000 -141000 -141000

105000
97183
0

105000
29517
50600

105000
0
166600

105000
97183
0

105000
29517
50600

105000
0
166600

105000
97183
0

105000
29517
50600

105000
0
166600

21000
-13183

21000
105083

21000
250600

21000
-13183

21000
105083

21000
250600

21000
-13183

21000
105083

21000
250600

-19183

99083

244600

-94183

24083

169600 -154183

-35917

109600

Decision - Tree

Profitability
Pearson
Continues

-6000

Pearson
Withdraws

-141000

Do not accept offer ------------->

Pearson
@ 3000

Accept offer ------------->

Pearson
@ 1500

Cost
inefficiency

-19183

Productivity
benefit

99083

Productivity
& cost benefit

244600

Cost
inefficiency

-94183

Productivity
benefit

24083

Productivity
& cost benefit

Pearson
discontinues

169600

Cost
inefficiency

-154183

Productivity
benefit

-35917

Productivity
& cost benefit

109600