Meregrs and Acquisitions

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**************************2006**************************
MCS 2006 (SUM NO 7)
Q) Soniya Company has two Divisions: A & B. Return on Investment for both divisions is 20%. Details are given below:- Particulars| Div A| Div B|
Divisional sales| 4000000| 9600000|
Divisional Investment| 2000000| 3200000|
Profit| 400000| 640000|
Analyse and comment on divisional performance of each.
ANSWER
As Profit Margin = Profit *100
Sales
Profit Margin for Division ‘A’= 4,00,000 /40,00,000 *100 = 10%
Profit Margin for Division ‘B’ = 6,40,000/ 96,00,000 *100 = 6.6%
Turnover of Investment = Sales * 100
Investment
Turnover of Investment for Division ‘A’ = 40,00,000/20,00,000 = 2 times
Turnover of Investment for Division ‘B’ = 96,00,000/32,00,000 = 3 times
As Return on investment for both Divisions A and B is 20%.
COMMENTS:-
Division ‘A’ – Although ‘A’ has more profit margin than Division ‘B’ that is 10% as compared to 6.6% of ‘B’, so it has more profitability but inspite of it, division ‘A’ has lower turnover of investment that its assets management is bad than Division ‘B’, it can be improved by increased sales or reducing investment.

Division ‘B’ – Needs to improve profit margin by increasing sales and reduce variable cost and sales at same price or by reducing salesprice and increase the volume of sales so that its profit would improve. As it has good assets management shown by its turnoverof Division ‘B’ that is 3 times which is better than Division ‘A’. So it can become profitable organisation by improving Profit Margin

2006: sum(11)
Two divisions A and B of sonali enterprises operate Profit centers. Div A normally purchases annually 10000 nos. of required components from Div B, which has recently informed Div A that it will increase selling price p.u to Rs. 1100. Div A decided to purchase the components from open market available at Rs.1000 p.u Div B is not happy and justified its decision to increase price due to inflation and added that the overall company profitability will reduce and decision will lead to excess capacity in Div B, whose V.C and Fixed cost p.u. are Rs. 950 and Rs.1100.  1. Assuming that no alternate use exists for excess capacity in Div B, will company benefit as a whole if Div A buys from the market.   2. If the market price reduces by Rs.80 p.u. What would be the effect on the company (assuming Div B has still excess capacity) if A buys from market. 3. If excess capacity of Div B could be use for alternative sales at yearly costs savings of Rs. 14.5 lacs, should Div A purchase from outside? Justify your answers with figures

ANSWER
1) Division ‘A’ action
BUY OUTSIDE (Rs.) (Rs.) BUY INSIDE Total Purchase Cost| 10,00,000| Nil|
Total Outlay Cost| Nil| 9,50,000|
Net Cash Outflow To The Company As A Whole| 10,00,000| 9,50,000| The Company as a whole will benefit if Division ‘A’ buys inside from Division ‘B’.

2) If the market price reduces by Rs.80 p.u
Division ‘A’ action
BUY OUTSIDE (Rs.)(Rs.) BUY INSIxDE Total Purchase Cost| 9,20,000| Nil|
Total Outlay Cost| Nil| 9,50,000|
Net Cash Outflow To The Company As A Whole| 9,20,000| 9,50,000|

The Company as a whole benefit if ‘A’ buys from outside supplier at Rs. (1000-80) = 920 3) If excess capacity of Div B could be use for alternative sales at yearly costs savings of Rs. 14.5 lakhs

Division ‘A’ action
BUY OUTSIDE (Rs.) (Rs.) BUY INSIDE Total Purchase Cost| 10,00,000| Nil|
Total Outlay Cost| Nil| 9,50,000|
Revenue From Using These Facilities| 1,45,000| |
Net Cash Outflow To The Company As A Whole| 8,55,000| 9,50,000|...
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