Costs and Good Health Biscuits

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By Venkatesh.G, NMIMS

KPCL has to work out for the possible options to cover its losses and provide a sustainable business model. It also has to decide to act upon the proposal offered by A-One Confectionaries Pvt. Ltd.

SWOT Analysis:
Let us do a SWOT analysis first for KPCL to identify the internal and external monitoring environment that affects its business. Internal Factors: Strengths • • • • • Weakness • • • High Absenteeism among workers resulting in low and fluctuating productivity 50% utilization capacity (Under utilization of resources) Closure of sister business (Candy Sale) Running business on ethical lines Popular brand – ‘MKG’ Participative Decision Making High Production Capacity Ploughing back surplus

External Factors: Opportunities • Contracts with APL and Pearson (thereby ensuring utilization of waste resources and gaining technical expertise) • Explore new markets (currently present only in northern region) • Improve the current market share • Supply to Canteens in Institutions Threats • • Increased competition in the organized and unorganized sectors High Excise Duty and Sales Tax

Based on the analysis, KPCL can take either of the following decisions  Status Quo – Do not accept the contract with APL and continue with the production of “Good health” by Pearson and “MKG” biscuits  Accept the proposal by APL and become a CMU. Either of the decision should be taken as soon as possible. Hence, the advantages and disadvantages of KPCL accepting the proposal with APL should be carefully analyzed before a right decision is taken.

Merit – Demerit Analysis:
KPCL has tied up currently with Pearson in producing “Good Health” Biscuits. The conversion ratio provided by Pearson is also high. Hence it might seem to be a good option of continuing the same and increasing the production of “Good Health” biscuits. But the market response of “Good Health” biscuits is not attractive. It is considered as a ‘high priced’ biscuit and hence the sustainability of this business model is doubtful. Now, coming to the proposal by APL, it is necessary to analyze the advantages and drawbacks of the KPCL-APL contract. Merits:  APL – Good brand name and a wider reach  Wastage of resources taken care of (Production of 70 extra tons initially. Increased if requirements met)  Avoidance of unnecessary expenses (Marketing, Distribution Expenses)  Minimal Business Risk  Avoiding losses and hence a sustainable model  Learning technical expertise and quality efficiency methods from APL  Exploring new markets with the help of APL  Less cost of raw materials Demerits:  Low conversion cost when compared to Pearson  Possible Dilution of ‘MKG’ brand name  No control over decision-making process  APL is a competitor in business to KPCL while Pearson is not  High contract period leading to uncertain situations  Bearing capital expenditure in case of change in equipment or process.  Distance factor between Chennai – Kanpur. Chances of interference and miscommunication. Thus, both the merits and demerits are equally weighed and it is seen that either of the decision has its own merits and pitfalls. The cost based analysis of various scenarios is then carried out.

Cost Analysis:
Fixed Costs (Overhead): o Permanent Salary Bill o Other Commitments o Interest Variable Costs: o Raw materials (Maida, Vanaspati and Sugar) o Preservatives and Packaging Costs o Casual Labor Calculations: Contribution per ton = (Price per ton) – (Variable Costs) Breakeven point = Fixed Cost / Contribution Revenue = (Units produced for MKG * Price per ton) + (Reimbursement Costs for Raw Material) + (Conversion costs per ton * No. of units produced for Pearson/APL) Expenses = (Variable Costs per ton * No. of units produced) +Fixed Cost Profit = Revenue – Expenses Conversion cost/ton = (Fixed Costs/Units Produced) + Labor cost per ton (Amortizing the overhead costs to check if the conversion cost...
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