Introduction:

The company has three product divisions – electronic equipments, electric systems and environmental
instruments. Now the company has decided to expand its operations but due to limitations company
has to do it gradually and so they are supposed to choose the best division to expand first. We will first
compute different ratios and other important figures for the present situation of all the three divisions
and then finally we will see the changes in these ratios and figures after expansion and compare the
improvement in each division with other so that the company can choose the best option.

Calculations:
Particulars EE $ MILLIONS ES ( $ MILLIONS) EI ($ MILLIONS)
Annual capacity 2000 UNITS 500 UNITS 1000 UNITS
S.P./unit 2,00,000 2,20,000 3,50,000
Sales 400 110 350
Variable Cost (40%) 160 38.5 175
Contribution 240 71.5 175
Less: operating cost 10 5 10
PBDIT 230 66.5 165
PBIT ( assumed 10% 230-12=218 66.5 – 4 = 62.5 165 – 6 = 159
depreciation)
PBT ( 10% INTEREST ON 218 – 12 = 206 62.5 – 4 = 58.5 159 – 6 =153
FIXED ASSESTS
ASSUMED)
PAT ( TAX=25%) 206-51.5 = 154.5 58.5 – 14.6 = 43.9 153 – 30.6 = 122.4

INVESTMENT 400/180 = 2.22 110/70 = 1.57 350/150 = 2.33

TURNOVER =
SALES/INVESTMENT

Now we will calculate estimated PAT for all the three divisions after expansion :

Particulars EE $ MILLIONS ES ( $ MILLIONS) EI ($ MILLIONS)

Annual capacity 500 UNITS 500 UNITS 600 UNITS
S.P./unit 2,00,000 2,15,600 3,43,000
Sales 100 107.8 205.8
Variable Cost (35%) 35 37.7 72.03
Contribution 65 70.1 133.7
Less: operating cost 12 6 12
PBDIT 53 64.1 121.7
PBIT ( assumed 10% 53-3=50 64.1 – 2 = 62.1 121.7 – 4 = 117.7
depreciation)
PBT ( 10% INTEREST ON 50 – 3 = 47 62.1 – 2 = 60.1 117.7 – 4 =113.7
 FIXED ASSESTS
ASSUMED)
PAT ( TAX=25%) 47- 11.75 = 35.25 60.1 – 15.02 = 45.08 113.7 – 22.7 =90.9

Total PAT = 35.25 + 154.5 = 189.75 45.08 + 43.9 = 88.98 90.9 + 122.4= 213.3

INVESTMENT 100/50 = 2 107.8/40 = 2.69 205.8/100= 2.05

TURNOVER =
SALES/INVESTMENT

Recommendations & Analysis:

According to me PAT and investment turnover plays as a major deciding factor as to which division to
select for expansion. Looking at both the tables we can see that PAT for ES is the lowest which rules out
this division immediately. Now the company has to choose from EE and EI , PAT for EI is less than EE
before expansion but after expansion if we calculate total PAT for both of them then EI gives 23.55
million extra then EE. Even the investment turnover ratio of EI is greater than EE in both the case. So
based on this ground I would recommend the company to expand the EI division first. Even the tax on EI
is 20% as compared to others which is 25% so EI is the best alternative for the company.