The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

Attempt Any Four Case Study

Case 1: Zip Zap Zoom Car Company
Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment. It was set
up 15 years back and since its establishment it has seen a phenomenal growth in both its market and
profitability. Its financial statements are shown in Exhibits 1 and 2 respectively.
The company enjoys the confidence of its shareholders who have been rewarded with growing
dividends year after year. Last year, the company had announced 20 per cent dividend, which was the
highest in the automobile sector. The company has never defaulted on its loan payments and enjoys a
favorable face with its lenders, which include financial institutions, commercial banks and debenture holders.
The competition in the car industry has increased in the past few years and the company foresees
further intensification of competition with the entry of several foreign car manufactures many of them being
market leaders in their respective countries. The small car segment especially, will witness entry of foreign
majors in the near future, with latest technology being offered to the Indian customer. The Zip Zap Zooms
senior management realizes the need for large scale investment in up gradation of technology and
improvement of manufacturing facilities to pre-empt competition.
Whereas on the one hand, the competition in the car industry has been intensifying, on the other
hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars,
but has also led to adoption of price cutting strategies by various car manufactures. The industry indicators
predict that the economy is gradually slipping into recession.

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)
Source of Funds
Share capital
350
Reserves and surplus
250
Loans :
Debentures (@ 14%)
50
Institutional borrowing (@ 10%)
Commercial loans (@ 12%) 250
Total debt
Current liabilities
Application of Funds
Fixed Assets
Gross block
Less : Depreciation
Net block
Capital WIP
Total Fixed Assets
Current assets :
Inventory
Sundry debtors
Cash and bank balance
Other current assets
Total current assets

600
100
400
200
1,200

1,000
250
750
190
940
200
40
10
10
260
-1200

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x
(Amount in Rs. Crore)
Sales revenue (80,000 units x Rs. 2,50,000)
Operating expenditure :
Variable cost :
Raw material and manufacturing expenses
Variable overheads
Total
Fixed cost :
R&D
Marketing and advertising
Depreciation
Personnel
Total

2,000.0
1,300.0
100.0
1,400.0
20.0
25.0
250.0
70.0
365.0

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

Total operating expenditure

1,765.0
Operating profits (EBIT)
235.0
Financial expense :
Interest on debentures
7.7
Interest on institutional borrowings
11.0
Interest on commercial loan
33.0
51.7
Earnings before tax (EBT)
183.3
Tax (@ 35%)
64.2
Earnings after tax (EAT)
119.1
Dividends
70.0
Debt redemption (sinking fund obligation)**
40.0
Contribution to reserves and surplus
9.1
*
Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).
**

The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.
The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology. Capital investment up to a maximum of Rs. 100
crore is required. The problem areas are three-fold.

The company cannot forgo the capital investment as that could lead to reduction in its market share as
technological competence in this industry is a must and customers would shift to manufactures
providing latest in car technology.

The company does not want to issue new equity shares and its retained earning are not enough for
such a large investment. Thus, the only option is raising debt.

The company wants to limit its additional debt to a level that it can service without taking undue
risks. With the looming recession and uncertain market conditions, the company perceives that
additional fixed obligations could become a cause of financial distress, and thus, wants to determine
its additional debt capacity to meet the investment requirements.

Mr. Shortsighted, the companys Finance Manager, is given the task of determining the additional debt
that the firm can raise. He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years
of recession. The company can raise debt at 15 per cent from a financial institution. While working out the
debt capacity. Mr. Shortsighted takes the following assumptions for the recession years.
a)

A maximum of 10 percent reduction in sales volume will take place.

b)

A maximum of 6 percent reduction in sales price of cars will take place.

Mr. Shorsighted prepares a projected income statement which is representative of the recession years.
While doing so, he determines what he thinks are the irreducible minimum expenditures under

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

recessionary conditions. For him, risk of insolvency is the main concern while designing the capital
structure. To support his view, he presents the income statement as shown in Exhibit 3.
Exhibit 3 projected Profit and Loss account
(Amount in Rs. Crore)
Sales revenue (72,000 units x Rs. 2,35,000)
1,692.0
Operating expenditure
Variable cost :
Raw material and manufacturing expenses 1,170.0
Variable overheads
90.0
Total
1,260.0
Fixed cost :
R&D
--Marketing and advertising
15.0
Depreciation
187.5
Personnel
70.0
Total
272.5
Total operating expenditure
1,532.5
EBIT
159.5
Financial expenses :
Interest on existing Debentures
7.0
Interest on existing institutional borrowings
10.0
Interest on commercial loan
30.0
Interest on additional debt
15.0
62.0
EBT
97.5
Tax (@ 35%)
34.1
EAT
63.4
Dividends
-Debt redemption (sinking fund obligation)
50.0*
Contribution to reserves and surplus
13.4
* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)
Assumptions of Mr. Shorsighted

R & D expenditure can be done away with till the economy picks up.

Marketing and advertising expenditure can be reduced by 40 per cent.

Keeping in mind the investor confidence that the company enjoys, he feels that the company can
forgo paying dividends in the recession period.

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising
Rs. 100 crore of debt to finance the intended capital investment. Mr. Arthashatra does not feel comfortable
with the statements and calls for the companys financial analyst, Mr. Longsighted.
Mr. Longsighted carefully analyses Mr. Shortsighteds assumptions and points out that insolvency should
not be the sole criterion while determining the debt capacity of the firm. He points out the following :

Apart from debt servicing, there are certain expenditures like those on R & D and marketing that
need to be continued to ensure the long-term health of the firm.

Certain management policies like those relating to dividend payout, send out important signals to the
investors. The Zip Zap Zooms management has been paying regular dividends and discontinuing
this practice (even though just for the recession phase) could raise serious doubts in the investors
mind about the health of the firm. The firm should pay at least 10 per cent dividend in the recession
years.

Mr. Shortsighted has used the accounting profits to determine the amount available each year for
servicing the debt obligations. This does not give the true picture. Net cash inflows should be used
to determine the amount available for servicing the debt.

Net Cash inflows are determined by an interplay of many variables and such a simplistic view should
not be taken while determining the cash flows in recession. It is not possible to accurately predict the
fall in any of the factors such as sales volume, sales price, marketing expenditure and so on.
Probability distribution of variation of each of the factors that affect net cash inflow should be
analyzed. From this analysis, the probability distribution of variation in net cash inflow should be
analysed (the net cash inflows follow a normal probability distribution). This will give a true picture
of how the companys cash flows will behave in recession conditions.

The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are
complex and require expenditure of time and effort to obtain and interpret. Considering the importance of
capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis. Information on
the behaviour of cash flows during the recession periods is taken into account.
The methodology undertaken is as follows :
(a) Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales
price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of
cash receipts and cash expenditures.

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

(b) Each factors behaviour (variation behaviour) in adverse conditions in the past is studied and future
expectations are combined with past data, to describe limits (maximum favourable), most probable
and maximum adverse) for all the factors.
(c) Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes
up with a range of estimates of the cash flow in future recession periods based on all possible
combinations of the several factors. He also estimates the probability of occurrence of each estimate
of cash flow.
Assuming a normal distribution of the expected behaviour, the mean expected
value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs.
110 crore.
Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr.
Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most
adverse industry conditions. Thus, the firm should take up only that amount of additional debt that it can
service 95 per cent of the times, while maintaining cash adequacy.
To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.
Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 Rs. 35 crore)
Question:
Analyse the debt capacity of the company.

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

CASE 2 GREAVES LIMITED

Started as trading firm in 1922, Greaves Limited has diversified into manufacturing and marketing of
high technology engineering products and systems. The companys mission is manufacture and market a
wide range of high quality products, services and systems of world class technology to the total satisfaction
of customers in domestic and overseas market.
Over the years Greaves has brought to India state of the art technologies in various engineering fields
by setting up manufacturing units and subsidiary and associate companies. The sales of Greaves Limited has
increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of Greaves Limited has increased
from Rs 214 crore in 1990 to Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company
increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the companys share has shown ups
and downs during 1990 to 1997. How has the company performed? The following question need answer to
fully understand the performance of the company:
Exhibit 1
GREAVES LTD.
Profit and Loss Account ending on 31 March
1990

1991

1992

1993

1994

(Rupees in crore)
1995

1996

1997

Sales

214.38 253.10 287.81 311.14 354.25 521.56 728.15 801.11

Raw Material and Stores

170.67 202.84 230.81 213.79 245.63 379.83 543.56 564.35

Wages and Salaries

13.54

15.60

18.03

37.04

37.96

48.24

60.48

69.66

Power and fuel

0.52

0.70

1.11

3.80

4.43

6.66

7.70

9.23

Other Mfg. Expenses

0.61

0.49

0.88

2.37

2.36

3.57

4.84

5.49

11.85

15.48

16.35

25.54

31.60

41.40

45.74

48.64

Depreciation

1.85

1.72

1.52

4.62

5.99

8.53

9.30

11.53

Marketing and Distribution

4.86

5.67

5.14

5.17

9.67

10.81

12.44

16.98

Change in stock

1.18

3.10

4.93

0.48

- 1.13

5.63

11.86

- 5.87

Other Expenses

Total Op Expenses

202.72 239.40 268.91 291.85 338.77 493.41 672.20 731.75

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Operating Profit

Marks:100

11.61

13.70

18.90

19.29

15.48

28.15

55.95

69.36

Other Income

2.14

3.69

4.97

4.24

7.72

14.35

11.35

13.08

Non-recurring Income

1.30

2.28

0.10

10.98

16.44

0.46

0.52

1.75

15.10

19.67

23.97

34.51

39.64

42.98

65.67

82.64

Interest
PBT

5.56
9.54

6.77
12.90

11.92
12.05

19.62
14.89

17.17
22.47

21.48
21.50

28.25
37.42

27.54
55.10

Tax

3.00

3.60

4.90

0.00

4.00

7.00

8.60

15.80

PAT

6.54

9.30

7.15

14.89

18.47

14.50

28.82

39.30

Dividend

1.80

2.00

2.30

4.06

7.29

8.58

12.85

14.18

Retained Earnings

4.74

7.30

4.85

10.83

11.18

5.92

15.97

25.12

PBIT

Exhibit 2
GREAVES LTD.
Balance Sheet
1990

1991

1992

(Rupees in crore)
1993

1994

1995

1996

1997

ASSETS
Land and Building

3.88

4.22

4.96

21.70

30.82

39.71

42.34

11.98

12.68

12.98

33.49

50.78

75.34

92.49 104.45

Other Fixed Assets

3.64

4.14

4.38

5.18

6.95

8.53

8.87

10.35

Capital WIP

0.09

0.26

10.25

11.27

34.84

14.37

13.92

14.36

Gross Fixed Assets

19.59

21.30

23.57

71.64 123.39 137.95 157.62 172.23

Less: Accu. Depreciation

12.91

14.56

15.79

19.84

25.74

Net Tangible Fixed Assets

6.68

6.74

7.78

51.80

97.65 104.05 115.06 118.86

Intangible Fixed Assets

0.21

0.19

0.05

4.40

Net Fixed Assets

6.89

6.93

7.83

Plant and Machinery

22.03

33.90
22.45

42.56
20.04

43.07

53.87
21.11

56.20 119.68 126.50 135.10 139.97

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

Raw Materials

5.26

6.91

7.26

21.05

28.13

44.03

53.62

50.94

Finished Goods

29.37

33.72

38.65

53.39

52.26

58.09

69.97

64.09

Inventory

34.63

40.63

45.91

74.44

80.39 102.12 123.59 115.03

Accounts Receivable

38.16

53.24

67.97

93.30 122.20 133.45 141.82 179.92

Other Receivable

32.62

40.47

49.19

24.54

59.12

64.32

76.57 107.31

Investments

3.55

14.95

15.15

27.58

73.50

75.01

75.07

76.45

Cash and Bank Balance

8.36

8.91

12.71

13.29

18.38

30.08

33.46

48.18

Current Assets

117.32 158.20 190.93 233.15 353.59 404.98 450.51 526.89

Total Assets

124.21 165.13 198.76 289.35 473.27 531.48 585.61 666.86

LIABILITIES AND CAPITAL

Equity Capital

9.86

9.86

9.86

18.84

29.37

29.44

44.20

44.20

Preference Capital

0.20

0.20

0.20

0.20

0.20

0.20

0.20

0.20

Reserves and Surplus

27.60

32.57

37.42 100.35 171.03 176.88 175.41 198.79

Net Worth
Bank Borrowings

37.66
14.81

42.63
19.45

47.48 119.39 200.60 206.52 219.81 243.19

26.51 24.82 55.12 64.97 70.08 118.28

Institutional Borrowings

4.13

3.43

9.17

38.09

38.76

69.69

89.26

63.60

Debentures

4.77

16.57

19.99

4.56

4.37

4.37

2.92

1.49

12.31

14.45

15.03

14.08

15.57

17.75

20.81

19.29

Commercial Paper

0.00

0.00

0.00

0.00

15.00

0.00

0.00

0.00

Other Borrowings

2.33

3.22

3.10

3.18

17.08

1.97

2.36

2.57

Current Portion of LT Debt

0.00

0.00

0.08

0.12

15.08

0.02

1.49

1.57

Borrowings
Sundry Creditors

38.35
37.52

57.12
49.40

73.72
59.34

Other Liabilities

5.70

10.16

10.70

3.59

1.42

1.99

1.70

3.04

Provision for tax, etc.

3.18

3.82

5.14

0.31

4.40

7.70

12.19

21.43

Proposed Dividends

1.80

2.00

2.30

4.06

7.29

8.58

12.85

14.18

Current Portion of LT Dept

0.00

0.00

0.08

0.12

15.08

0.02

1.49

1.57

Fixed Deposits

Current Liabilities
TOTAL LIABILITIES

84.61 130.82 158.73 183.94 203.66

77.27 113.66 148.13 153.63 179.79

48.20 65.38 77.56 85.35 141.85 166.42 181.86 220.01

124.21 165.13 198.76 289.35 473.27 531.67 585.61 666.86

Additional information:
Share premium reserve

47.69 107.40 107.91

93.35

93.35

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

Revaluation reserve
Bonus equity capital

8.51

8.51

8.51

8.91

8.70

8.50

8.31

8.15

8.51

8.51

8.51

23.25

23.25

Exhibit 3

Closing share price (Rs)

GREAVES LTD.
Share Price Data
1990 1991 1992
1993
27.19 34.74 121.27 66.67

Yearly high share price (Rs)

29.25 45.28 121.27 126.33

90.00 100.01

90.00

85.00

Yearly low share price (Rs)

26.78 21.61

42.67

45.00

43.75

Market capitalization (Rs crore

65.06 67.77 236.56 274.84

EPS (Rs)
Book value (Rs)

4.79

34.36

48.34

1994
1995
1996
78.34 71.67 47.5
68.34

1997
48.25

346.35 316.87 210.02 213.34

6.82

9.73

1.93

2.66

7.16

5.03

9.01

35.64 37.22

42.54

57.75

40.61

64.98

45.35

50.73

Questions
1. How profitable are its operations? What are the trends in it? How has growth affected the profitability
of the company?
2. What factors have contributed to the operating performance of Greaves Limited? What is the role of
profitability margin, asset utilisation, and non-operating income?
3. How has Greaves performed in terms of return on equity? What is the contribution of return on
investment, the way of the business has been financed over the period?

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

CASE 3 CHOOSING BETWEEN PROJECTS IN ABC COMPANY

ABC Company, has three projects to choose from. The Finance Manager, the operations manager are
discussing and they are not able to come to a proper decision. Then they are meeting a consultant to get
proper advice. As a consultant, what advice you will give?
The cash flows are as follows. All amounts are in lakhs of Rupees.
Project 1:
Duration 5 Years
Beginning cash outflow = Rs. 100
Cash inflows (at the end of the year)
Yr. 1 Rs 30; Yr. 2 Rs 30; Yr. 3 Rs 30; Yr.4 10; Yr.5 10
Project 2:
Duration 5 Years
Beginning Cash outflow Rs. 3763
Cash inflows (at the end of the year)
Yr. 1 200; Yr. 2 600; Yr. 3 1000; Yr. 4 1000; Yr. 5 2000.
Project 3:
Duration 15 Years
Beginning Cash Outflow Rs. 100
Cash Inflows (at the end of the year)
Yrs. 1 to 10 Rs. 20 (for 10 continuous years)
Yrs. 11 to 15 Rs. 10 (For the next 5 years)
Question:
If the cost of capital is 8%, which of the 3 projects should the ABC Company accept?

CASE 4 STAR ENGINEERING COMPANY

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

Star Engineering Company (SEC) produces electrical accessories like meters, transformers,
switchgears, and automobile accessories like taximeters and speedometers.
SEC buys the electrical components, but manufactures all mechanical parts within its factory which is
divided into four production departments Machining, Fabrication, Assembly, and Paintingand three service
departmentsStores, Maintenance, and Works Office.
Though the company prepared annual budgets and monthly financial statements, it had no formal cost
accounting system. Prices were fixed on the basis of what the market can bear. Inventory of finished stocks
was valued at 90 per cent of the market price assuming a profit margin of 10 per cent.
In March, the company received a trial order from a government department for a sample transformer
on a cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job No 879) in early April
and completed all manufacturing operations before the end of the month.
Since Job No 879 was very different from the type of transformers they had manufactured in the past,
the company did not have a comparable market price for the product. The purchasing officer of the
government department asked SEC to submit a detailed cost sheet for the job giving as much details as
possible regarding material, labour and overhead costs.
SEC, as part of its routine financial accounting system, had collected the actual expenses for the
month of April, by 5th of May. Some of the relevant data are given in Exhibit A.
The company tried to assign directly, as many expenses as possible to the production departments.
However, It was not possible in all cases. In many cases, an overhead cost, which was common to all
departments had to be allocated to the various departments using some rational basis. Some of the possible
bases were collected by SECs accountant. These are presented in Exhibit B.
He also designed a format to allocate the overhead to all the production and service departments. It
was realized that the expenses of the service departments on some rational basis. The accountant thought of
distributing the service departments costs on the following basis:
a. Works office costs on the basis of direct labour hours.
b. Maintenance costs on the basis of book value of plant and machinery.
c. Stores department costs on the basis of direct and indirect materials used.
The accountant who had to visit the companys banker, passed on the papers to you for the required
analysis and cost computations.

REQUIRED

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

Marks:100

Based on the data given in Exhibits A and B, you are required to:
1. Complete the attached overhead cost distribution sheet (Exhibit C).
Note: Wherever possible, identify the overhead costs chared directly to the production and service
departments. If such direct identification is not possible, distribute the costs on some rational basis.
2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This
should include share of the service departments costs.
3. Do you agree with:
a. The procedure adopted by the company for the distribution of overhead costs?
b. The choice of the base for overhead absorption, i.e. labour-hour rate?

Exhibit A
STAR ENGINEERING COMPANY
Actual Expenses(Manufacturing Overheads) for April
RS

RS

Indirect Labour and Supervisions:

Machining
Fabrication
Assembly
Painting
Stores
Maintenance

33,000
22,000
11,000
7,000
44,000
32,700

1,49,700

Indirect Materials and Supplies

Machining
Fabrication
Assembly
Painting
Maintenance

2,200
1,100
3,300
3,400
2,800

12,800

Others
Factory Rent
Depreciation of Plant and Machinery
Building Rates and Taxes
Welfare Expenses

1,68,000
44,000
2,400
19,400

The Indian Institute of Business Management & Studies

SUBJECT: Finance Management

(At 2 per cent of direct labour wages and Indirect labour and
supervision)
Power
(MaintenanceRs 366; Works Office Rs 2,200, Balance to
Producing Departments)
Works Office Salaries and Expenses
Miscellaneous Stores Department Expenses

Marks:100

68,586
1,30,260
1,190

4,33,930
5,96,930

The Indian Institute of Business Management & Studies

SUBJECT: Financial Management

Marks:100

Exhibit B
STAR ENGINEERING COMPANY
Projected Operation Data for the Year
Department

Machining
Fabrication
Assembly
Painting
Stores
Maintenance
Works Office
Total

Area
(sq.m)

13,000
11,000
8,800
6,400
4,400
2,200
2,200
48,000

Original Book
of Plant &
Machinery
Rs
26,40,000
13,20,000
6,60,000
2,64,000
1,32,000
1,98,000
68,000
52,80,000

Direct
Materials
Budget

Direct
Labour
Hours

Direct
Labour
Budget

10,80,000

20,000
10,000
1,000
2,000

14,40,000
5,28,000
7,20,000
3,30,000

Rs
52,80,000
25,40,000
13,20,000
6,60,000

94,80,000

33,000

30,18,000

99,00,000

Rs
62,40,000
21,60,000

Horse
Power
Rating

Note
The estimates given in this exhibit are for the budgeted year January to December where as the actuals in Exhibit A are just one monthApril of
the budgeted year.

The Indian Institute of Business Management & Studies

SUBJECT: Financial Management

Marks:100

Exhibit C
Departments
Overhead Costs
A. Allocation of Overhead to
all departments
A.1 Indirect Labour and
Supervision
A.2 Indirect materials and
supplies
A.3 Factory Rent
A.4 Depreciation of Plant and
Machinery
A.5 Building Rates and Taxes

STAR ENGINEERING COMPANY

Actual Overhead Distribution Sheet for April
Production Departments
Service Departments

Total
Amount
Actuals for
April (Rs)

1,49,700
12,800
1,68,000
44,000
2,400

A.6 Welfare Expenses

A.7 Power
A.8 Works Office Salaries and
Expenses
A.9 Miscellaneous Stores
Expenses
A. Total (A.1 to A.9)
B. Reallocation of Service
Departments Costs to
Production Departments
B.1 Distribution of Works
Office Costs
B.2 Distribution of

19,494
68,586
1,30,260
1,190
5,96,430

Basis for
Distribution

The Indian Institute of Business Management & Studies

SUBJECT: Financial Management
Maintenance Departments
Costs
B.3 Distribution of Stores
Departments Costs
Total Charged to Producing
C. Departments (A+B)

Marks:100

5,96,430
D. Labour Hours Actuals for
April
1,20,000
E. Overhead Rate/Per Hour (D)

44,000

60,000 27,500

The Indian Institute of Business Management & Studies

Subject: Financial Management

Marks: 100

Case 5: EASTERN MACHINES COMPANY

Raj, who was in charge production felt that there are many problems to be attended to. But Quality
Control was the main problem, he thought, as he found there were more complaints and litigations as
compared to last year. With the demand increasing, he does not want to take any chances.
So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.
Raj: I am in charge of checking the components, which we use, when we assemble the machines for
customers. For most of the components, suppliers are very reliable and we assume that there will not be any
problem. When we generally test the end product, we dont have failures.
Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.
Raj: Recently we have been having problems, and there has been some complaint or other about the
machines we have supplied. I am worried and would like to check the components used. I would like to
avoid lot of expensive rework.
Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each
machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.
Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many
components from many suppliers. We have been producing more with extra shifts. We are trying to capture
the market and increase our market share.
Namdeo: We order for components from different places, and sometimes we do not have time to check all.
There is a time lag between order and supply of components, and we cannot wait as production will stop. We
use whatever comes soon as we want to complete our orders.
Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the
components. We need to get a sample from each shipment from our component suppliers. But I do not know
how many we should test.
Namdeo: We should ask somebody from our statistics dept. to attend to this problem.
As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence
choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?