DISTILLATION PROCESS 10000 mls.

SWAPNA
10000 Kgs

AROMATIC ROOTS

DISTILLATION PROCESS AROMATIC OIL

Cost

Alternative 1 Alternative 2 Alternative 3

Operate the Distillation Department with existing equipment Operate the Distillation Department with new equipment Do not operate the Distillation Department

EXISTING EQUIPMENT CONTRIBUTION (40-2)*10000-160000-80000+Contribution from the best alternativeA/B/C Contribution per unit of roots (basic input) Rs. 14+Contribution from best alternative B/C Rs. 15 (in case of C) or Rs. 20.4 (in case of B) Relevant/ incremental fixed costs Relevant/ incremental fixed costs BREAK EVEN QUANTITY 48000 (Alternative C) 72000 (Alternative B) 3200

NEW EQUIPMENT CONTRIBUTION (40-2)*10000-160000-80000+30000+Contribution from the best alternativeA/B/C Contribution per unit of roots (basic input) Rs. 17+Contribution from best alternative A/C Rs. 18 (in case of C) or Rs. 23.4 (in case of A) Relevant/ incremental fixed costs Relevant/ incremental fixed costs 48000 (Alternative C) 72000 (Alternative B)

BREAK EVEN QUANTITY

2666.67

Decision
Operate Distillation Department with new machine if roots available are more than 2667 Kgs. Do not operate Distillation Department if roots availability is less than 2667 Kgs. (After installing the new machine) Operate Distillation Department if roots availability is more than 2667 and less than 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 penalty for dumping it

(2) With regards to adoption of the new process developed for the Extraction Department, it would be beneficial to ad availability of roots is more than 4444 Kgs. The company should not run the extraction Department if the availability

(3) On similar lines, the firm should continue Distillation Process subject to minimum availability of 2667 Kgs. of roo alternative will be to run the Distillation Department and sell Aromatic Oil directly in the market. Processing of arom

(4) The firms should install the new machine as incremental benefits are more than incremental costs. Besides, instal of roots in the case of old machine. Therefore, by installing new machine, the firm can operate the distillation Departm

RAJNIGANDHA PERFUMERIES
Rs. 40/ml EXTRACTION PROCESS Old Process New Process Add. Cost (New Process)

SWAPNA

AROMATIC OIL
Rs. .40/ml

EXTRACTION PROCESS

xisting equipment ew equipment

Alternative A Alternative B Alternative C

Operate the Extraction Department with existing proc Operate the Extraction Department with new process Do not operate the Extraction Department

140000 ibution from best /C se of C) or Rs. 20.4

EXISTING PROCESS CONTRIBUTION (12.5-8)*20000-5000-25000-(500*20) 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 NEW PROCESS 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

ernative C) ernative B)

140000

Given the higher amount of Contribution per unit of costrained resource ( should be adopted. Break Even Quantity Relevant fixed cost BEP FC/CMPU 24000 4444.44

ibution from best /C

se of C) or Rs. 23.4

ernative C)

ernative B)

Decision

Operate Extraction Department with new process if roots available are mo

Operate Extraction Department with new process if roots available are mo

Do not operate Extraction Department if roots availability is less than 444

are more than

an 2667 Kgs. (After

7 and less than

sible penalty for dumping it in the lake could be severe. Given these possibilities, the company should not dump residue in the la

, it would be beneficial to adopt the new process as contribution (per kg of roots) is higher for the new process compared to that epartment if the availability of the roots is lower than 4444 Kgs otherwise the firm will run into losses.

ailability of 2667 Kgs. of roots. If the availability of roots is less than 2667 Kgs., the firm should not run Distillation Department. market. Processing of aromatic oil in the extraction Department will be beneficial only if the availability of roots is more than 44

mental costs. Besides, installing new machine will result into higher level of contribution per kg of roots; that will reduce the bre erate the distillation Department subject to minimum availability of 2667 Kgs. of roots.

ANDHA PERFUMERIES

RACTION PROCESS 20000 mls. P=Rs. 12.5/ml 18000 mls. P=Rs. 15/ml Rs. 0.2/ml of aromatic oil

MANORAMA

SANJIVINI RESIDUE Dump into Lake

n Department with existing process n Department with new process traction Department

ISTING PROCESS 50000 10000 1 5 4

NEW PROCESS 64000 10000 1 6.4 5.4

*100000)

We have to process the fibrous Sanjivini as dumping residue in a permanent solution. Besides more severe penalties in futur Therefore, we don't hav contimnue with I's production Rs. 20 per kg of Sanjivini.

per unit of costrained resource (roots), new process

process if roots available are more than 4444.44 Kgs.

process if roots available are more than 4444.44 Kgs.

oots availability is less than 4444.44 Kgs.

ompany should not dump residue in the lake.

her for the new process compared to that in the case of old process.Further, the company should run Extraction Department only run into losses.

m should not run Distillation Department. For availability of roots more than 2667 Kgs. and less than 4444 Kgs., the best possibl if the availability of roots is more than 4444 Kgs.

on per kg of roots; that will reduce the breakeven quantity for running the Distillation Department to 2667 Kgs of roots instead of

Alternative 1 COSTS

Produce Sanjivini Old Process New Process 10000 Kgs 10000 12000 20000 Kgs 20000 24000 Dump into the lake Possible severe penalty & CSR

Alternative 2 COSTS Rs. 14000

process the fibrous residue into dumping residue into the lake is not solution. Besides, it can attract penalties in future. efore, we don't have any choice but ith I's production despite of a loss of g of Sanjivini.

traction Department only if the

444 Kgs., the best possible

67 Kgs of roots instead of 3200 Kgs

Incremental Analysis for Purchansing New Equipment INITIAL INVESTMENT Incremental Depreciation per year Incremental Benefits/ PAT 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

DO NOT DISPOSE OFF THE OLD MACHINE (KEEP IT AND DEPRECIATE IN NEX INCREMENTAL PAT 0 5000 5000 5000 5000 5000 Incremental Outlay & Incremental Depreciation -100000 20000 20000 20000 20000 20000 0 Total Cost/ Benefit -100000 25000 25000 25000 25000 25000 25000

YEAR 0 1 2 3 4 5 TOTAL

Alternative 2

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 take tax benefit of l 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

YEAR 0 1 2 3 4 5 TOTAL

It may be noted that in both the alternatives, the final result remains intact. This occurs a benefits and associated costs. In case we consider time value of money, the decision to di to note that the cashflows occurring at different times should not be compared right away considering appropriate discount factor (cost of capital). The time value of money has bee situation.

ansing New Equipment 100000 20000

efits/ PAT 15000 10000 5000

ND DEPRECIATE IN NEXT 5 YEARS)

HINE 0 50000 50000 25000

ble to take tax benefit of loss)

ns intact. This occurs as we have ignored the time differences that exist between the ney, the decision to dispose-off old machine will be preferred. However, it is important e compared right away. Therefore, these benefits and costs need to be analysed by value of money has been ignored deliberately in order to avoid further complexity of the