Decision:

Cost Decisional Analysis

Sheikh Shahrukh
Abdullah Ishtiaq
Haris Hafeez
Usman Shaukat

01-222152-057
01-222152-041
01-222152-049
01-222152-0

Pakistani Fertilizer Industry An Overview

Integral part of Pakistani Economy

First fertilizer plant was established by NFC in 1958 followed by Exxon in 1965
Fauji Fertilizers Established in 1978
Total market capitalization is PKR 656 bn
Major Players:
FFC, FFBL, Engro, Fatima, Pak Arab, Agri tech, Dawood Hercules
Major Products: Urea 71%, DAP21%

Company Profile Engro Fertilizers

First plant established in 1968 by Pak Atanvac (an Esso / Mobil joint venture)
Converted to Engro Chemicals Pakistan in 1991 after an employee buy-out
Converted to Engro Fertilizers after restructuring of diverse businesses of
Engro Chemicals in 2010

Invested USD 1.1 billion in a new urea plant enVen 3.0 in 2007
IPO announced in 2013
1968 KT urea produced in 2015 max ever
87% capacity utilization of urea plant
Market Value Per Share: 70.06

Company Profile - FFC

Largest Urea manufacturing company

Incorporated in 1978
Three plants
Aggregate capacity of 2 million tons per annum
2469 KT Urea produced in 2015
Market Value Per Share: 117.98

Vision

Promoting the growth of communities around Engros supply chain and giving

people equal access to choices, opportunities and the ability to exercise their
rights. Engro Foundation is constantly striving to further develop our strategy
and move our work towards greater sustainable impact. Our objective going
forward is to improve livelihoods in our value chains and empower communities
towards identifying goals and priorities for better local outcomes.
Engro Foundation aims to realize the dreams of our people to make a
difference in the lives of those around us and in our value chain. At Engro, we
believe in the power of Pakistans human capital to change the face of
communities and economies and make them agents of a wider change.

Mission

Engro Foundation is committed to make a positive impact in the lives of those

living in communities around its supply chain through the provision of improved
basic services (health, infrastructure, water and sanitation); education and skill
development; environment and livelihood training. In addition, it works with
partner organizations to provide financial and technical support in response to
natural calamities.
through its network of facilities across Pakistan, Engro aims to make a
difference in communities where average household income borders on or is
below the poverty benchmark. Engro Foundation works across rural and
suburban Pakistan in partnership with development organizations to create a
trickledown effect of resource development, enabling indigenous communities
to sustain economies, employ their human resources, and learn the critical
skills they need to be part of the mainstream economy.

Core values

At Engro, we support our leadership culture through unique systems and

policies which ensure open communication, foster an environment of employee

and partner privacy, and guarantee the well-being and safety of our employees.
Our core values form the basis of everything we do at Engro; from formal
decision making to how we conduct our business to spot awards and
recognition. At Engro we never forget what we stand for.

We believe that a successful business creates much bigger economic impact

and value in the community, which dwarfs any philanthropic contribution.

Hence, sustainable business development is to be anchored in commitment to
engage with key stakeholders in the community and society.

Products

Engro Urea.
Engro DAP
Engro NP
Engro Zarkhez
Engro zingro
Engro Envy
Engro MOP

Rupees

Income Statement

In the mentioned data:

(Amounts taken below are
in millions and have been
rounded down for
presenting in millions)

Sales
Cost incurred for the production:

68,875,325

Raw material

18,589,567

Labor Cost
FOH:

2,178,564

Fuel and Power

7,499,418

Depreciation

4,694,369

Insurance

354,154

Rent, rates and taxes

1,715,000

Consumables

305,245

Total FOH
Total Direct cost
Indirect costs:

14,568,186
35,336,317

Selling and Distribution

5,465,925

Admin. Cost

865,778

Other expenses

565,785

Fixed cost

6,897,488

Net profit

26,641,520

Production Status

Ton

Production capacity

3,275

Actual production

1,968

Interpretation

Variable costs are:

Raw material Rs. 18 million
Direct Labor Rs. 2.2 million
Factory overhead Rs. 14.5 million
Fixed / Sunk costs are:
Selling and Distribution expenses Rs. 5.5 million
Administration expenses Rs. 0.9 million
Other expenses Rs. 0.6 million

 Variable cost per ton is Rs. 17,632

(35,336,317/1,968)

And Total fixed cost is Rs. 7 million

For decision as to make or buy, we take contribution (sales minus variable cost)
as base for decision the fixed cost saved through buy decision is also taken into
considerations.

Make or buy decisions

If the company has the freedom of choice about whether to make internally or

buy externally and has scarce resources that put a restriction on what it can do
itself, the relevant costs for the decisions will be the differential costs between
the two options.

The company makes urea for which costs for the month are expected to be as
follows:

The company can buy Urea from vendors of urea for Rs. 25,000 per ton.

On analysis of profit and loss for the two options of making and
buying we get the results as under:
Description

Ton

Making
per ton

Buying
Total

per ton

Total

Selling cost per ton

34,997

68,874,096

34,997

68,874,096

Variable cost of production

17,632

34,699,776

25,000

49,200,000

7,000,000

7,000,000

Total fixed cost

Gain / (loss)

41,699,776

49,200,000

27,174,320

19,674,096

Decision

Making decision seems viable for the company in the current situation

Special order Decision

The company has a special order for the production of 1,000 tons of Urea
that company normally produces in the ordinary course of its business.
The incremental costs and incremental revenue for 1,000 tons of Urea has
been given as under:

Incremental Profit and Loss statement

Special order
Incremental revenue per ton

Rupees

1,000 ton
34,998

Incremental cost per ton:

Material

9,446

Labor

1,107

FOH

7,402
17,955

Total revenue

34,998,000

Total incremental cost

17,955,000

Incremental profit

17,043,000

Decision:
On the basis of above analysis it has been concluded that the special order
should be accepted for making 1,000 tons Urea as it makes incremental
profits of Rs. 17,043 per ton and total incremental profits of Rs.17 million.

THANK YOU !!