CASE STUDY#2 ON COSTING IN PEPE

DENIM

Introduction:
Pepe Denim as a private Ltd. in Ahmadabad, Gujarat in 1984. In 1994, the brothers set to
convert the company into a public Ltd. Pepe Denim began manufacturing operations with just one
complex in Ahmadabad district but, the brother’s place throughout a heap of diligence and took the
company to level where in 2011. It had 300 stores unfold throughout the country and a person of
20,000. It collectively aware of export its jeans to China, Brazil, and Nepal. Pepe's denim was
doing good business till 2007 and sales were increasing every year. Once 2007 its stock prices
began to say no, sales remaining consistent and collectively profits began to fall. The company
thought it had been due to delay and recession. However, profits continuing to mention no even
once 2010 once the economy had started revitalizing, stock indices had started rising and
collectively the opposite firms stock prices of other firms had conjointly started soaring.

Facts:
Till 2007, the company did excellent business with its sales increasing once a year. It
attained exceptional growth in valuation succeeding from an increase among the company’s stock
prices. After 2007, however, the stock prices of the company began to say no even though sales
continued to be consistent. Though' there was no decrease in sales, the profits began to fall. The
brothers thought that the decline among the stock prices and profits was due to the economic delay
and recession. Since there was consistency in sales, they terminated that the profits were declining
as a results of the increase in costs due to inflation. but the stock prices of the company remained
flat and profits continued to mention no even once 2010 once the economy had started revitalizing,
stock indices had started rising, collectively the stock prices of other firms had conjointly started
soaring. The shareholders of the company raised issues over the declining profits of the company.
As results of a heated shareholders’ meeting, Bajaj came fraught to spice up the company’s cash
position and its market valuation.

Exhibit – I

Production and Sales - 1500000 units (in 000s)

Sales - 1500000
On account of intense
Direct Wages- 270000 competition, ulterior
Direct Materials 330000 changes were calculable
Factory Overheads- 325000 within the subsequent year:
1. Production and sales
Administration overheads- 205000 activity would be augmented
by one third.
Sales overheads- 90000 2. Material rate would be
down by twenty fifth.
 However, there would be a 2 hundredth increase in consumption which might beware of the rise in
production level.
3. Direct wages price would be reduced by 2 hundredth because of automation.
4. Out of the higher than mill overheads (given in Exhibit I), Rs. 45000 were mounted in nature. The
remaining mill expenses would be variable in proportion to the amount of units made.
5. Total administration expenses would be down by four-hundredth.
6. Sales overhead per unit would stay constant.

Q1. Vipin told Kesar Bajaj that a 6 % decline in profit on sales was expected in 2011. If the
given information is correct then what would be the selling price of a pair of jeans for the
year ending March 31, 2011?
  Cost Sheet Amount in '000
Particulars 2010 2011
capacity (in units) 1500000 2000000
  CPU AMOUNT CPU AMOUNT
Direct Wages 180 270,000 144 288,000
Direct Material 220 330,000 165 396,000
Prime Costs 400 600,000 342 684,000
Add: Factory overheads 216.67 325,000 216.66 433,318.33
Work costs 616.67 925,000 559 1,117,318
Add: Administration Overheads 136.67 205,000 61.5 123,000
         
Cost of Goods Sold 753.33 1,130,000 620.16 1,240,318
Add: Selling and Distribution
60 90,000 60 120,000
overhead
Cost of Sales 813.33 1,220,000 680.16 1,360,318
Profit   280,000   263,200
Sales   1,500,000   1,623,518

Working Note
Direct wages 180-20%=144
Administration exp. = 205000-40 %. =123000
Sales overhead= 60 X 2000 = 120000
Factory overhead = 325000000-45000 Direct martial =220*25%=165
=2000000+2000000*20%=2400000
= 324955000*2000000
1500000 =2400000/1000=2400
=165*2400
=433318.3
=396000

Q2. Showing Kesar Bajaj in getting the total cost estimate of all the three products – Jeans,
Denim Skirts, and Denim Handbags? If yes, what is the total cost of all three products?

Production and sale 1500000*1/3=2000000

Profit= 2, 80,000-6%= 2, 80,000-16,800= 2, 63,200
Selling Price= 1623518333/20, 00,000= 812
Cost sheet of Jeans, Denim skirts and Denim Handbags
Particulars Jeans Denim Skirts Denim Handbags
Opening Stock of Raw material 200,000    
Add: Purchase 600,000 300,000 100,000
Add: Carriage on Purchase 12,000 6000 2,000
Less: Closing stock -150000 -75000 -25000
Raw material consumed 662,000 231,000 77,000
Less: Sale of material -25,000    
Add: Production wages 300,000 120,000 180,000
Prime cost 937,000 351,000 257,000
Add: Factory overheads      
Dyeing and water charges 3,000 1500 500
Rent, rates, taxes, and insurance 12,000 6000 2,000
Manager’s salary 10,000 6900 5,000
Repairs of plant, machinery, and tools 8,000 4000 1,600
Depreciation written off on plant, machinery,
tools 9,000 3000 2,000
Salaries 15,350 10,000 5,000
Work cost Incurred 994,350 382,400 273,100
Add: Opening work in progress 100,000    
Less: closing work in progress -35,000 -10,000 -5,000
Work cost 1,059,350 372,400 268,100
Add: Administration overheads 25,000 15,000 5,000
Rent, rates, taxes, and insurance 2000 700 300
Depreciation written off on office furniture 1800 400 200
Director’s fees 15000 7000 3000
Gas and water charges 850 300 100
General charges 12750 5000 3000
Manager’s salary 8000 5000 2000
Cost of Production 1,124,750 405,800 281,700
Add: Opening of finished goods 350,000    
Less: Closing of finished goods -450,000 -200,000 -120,000
Cost of Goods Sold 1,024,750 205,800 161,700
Add: Selling and Distribution overheads      
Carriage on sales 13000 5000 2,000
Traveling expenses 7000 5000 3,000
Traveler’s salaries and commission 20000 13000 7,000
Advertising 28000 21000 8,750
Bad debts 8000 1500 500
Cost of Sales 1,100,750 251,300 182,950
 Working note        
Total Cost of Sales 1100750 251300 182950 1535000

Note:
Cash discount is financial
item and it is excluded
from cost accounts

Q3. You are required to reconcile the profit with the Income Statement.

Income statement:
Particular Amt. Amt.
Sales 20,00,000
Less: Cost 12,63,450
Gross profit 7,36,550
Less: Indirect expense
Office expense 12,91,150
Selling & distribution  12,60,000 25,51,150
Net profit before Depreciation 4,81,400
Less: Depreciation 1,64,000
Net profit after Depreciation 4,65,000
Less: Tax @ 40% 1,86,000
Profit after Tax 2,79,000

Q4. Do you think the decision of the company to add two new products was beneficial? If
yes, how?

1. The choice of the corporate to feature 2 new product was useful become financial statement
showed profit before tax on sales.
2. Viewing the info and figures we will conclude that the choice of the corporate to feature 2 new
product was useful as a result of the financial statement that showed the profit before tax on sales
and it found out to be twenty three.25% that was four.25% more than the previous year’s profit.
3. There was a lot of profit this year than previous year.

Recommendations:
They are less to advocate to the corporate as by Sneha's recommendations the profits have
completely increase allot within the company within the year 2010-2011. As we will analysis, the
2010 towards the 2012 price sheet like profits and sales have augmented allot. and that we may
also advocate that if they embody a lot of product like denim shoes and purse in order that sales
can improve within the company. they must forever think about their competitors as a result of the
explanation behind that's in 2010 they created same mistakes and profit worth’s have completely
decrease and so they notice that sales was constants however profits value have decrease.

Conclusion:
This Case Study helps us understanding and analyze the decision to add two new product lines on
the basis of comparison of Cost and Profit before and after introduction of New Product. With this
the case Study gives enough scope to derive, different Cost Concepts like full cost, direct and
indirect Cost, elements of Product Cost, different kind of overheads and last how to calculate the
total cost of a Product.

Name: Prajwal Khandare

Class: MBA Marketing Div-B
Roll no: 20MBAMKT090
Subject: ABM