Problem statement: Whether KCPL should accept APL's proposal to become a CMU for APL?

Options available:
1. Accept APL's proposal and continue engagement with Pearson
2. Accept APL's proposal and discontinue engagement with Pearson
3. Reject APL's proposal and continue engagement with Pearson

Analysis: Contribution and Profit statement for the options:

Working with APL would not only take care of the surplus capacity but also provide significant manufacturing and process know-how
to KPCL. The benefit derived from this is calculated in the table below. However, it is to be noted that the benefit would accrue over
time and could also involve incurring of fixed costs by MKG. Purely based on a numerical analysis, accepting MKG’s proposal would
be a good idea provided there is some visibility of benefits accruing (a break-even analysis would be necessary to determine the
payback period of investments made and would be an important determinant). As seen above, without such benefits accruing,
APL’s contract will have negative contribution while Pearson’s contract will have a good contribution margin, regardless of
productivity benefits. However, Pearson’s products are not doing very well and a revised demand / pricing scenario would require
further analysis.

There are concerns that APL could interfere with MKG’s business and also restrict the ability & bandwidth to grow MKG’s business.
In order to break-even as a stand-alone entity, MKG would require a volume of c.203MT. While it does have the capacity (240MT), it
would be necessary to generate additional demand since prices cannot be increased. The company could explore multiple avenues
like expanding distribution to other less-competitive regions, targeting SMEs more aggressively (currently KPCL is serving only 1.5%
of the market). If the company operates at a capacity of 240MT at similar contribution levels, it would earn a total contribution of INR
408,000. Additional fixed costs incurred to increase demand would need to be evaluated to determine if this would be a profitable
expansion. Nevertheless, the company would need to expand its capacity manifold to compete effectively against APL. With the
current losses and financial situation, it would be

Conclusion
With the current loss position as well as scope of improving productivity, it would be a good idea to take up APL’s proposal. The
proposal is for a period of 3 years - at the end of the three years, KPCL can analyse its financial position and process flows to
determine whether it can function better as a standalone entity. The relationship with Pearson should be continued for its good
contribution margins