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Gas is distributed in two usage-based segments viz. domestic & commercial. The domestic
segment has only one denomination (commonly known as a gas cylinder) viz. 14.2
kilograms. The distributor is billed at Rs. 300 per 14.2 kilogram denomination. The
commercial segment has three sub volume based denominations viz. 19 kilograms, 35
kilograms and 47.5 kilograms. The distributor is billed at Rs. 1,000 for 19 kilogram; Rs.
1,860 for 35 kilogram; and Rs. 2,511 for 47.5 kilogram denomination. The petroleum
company has its owned distribution network that enables delivery of gas cylinders to the
distributors’ warehouses. Distributors are not charged anything extra for this service.
The domestic segment is service driven. The prices of gas for the domestic segment cannot
be influenced as it is subsidized by the government. The distributors can differentiate only
on the basis of services they offer to customers, which is the selling pitch in this segment.
RGS has its own distribution network and workforce that delivers the cylinders to the
doorsteps of customers. However, there is an existing market of outsourcing the
distribution function. In such cases the distributor pays a fixed charge per delivery. Each
such delivery will cost Rs. 6 as per the market forces. RGS has at present a sale of 15000
cylinders per month in the domestic segment. Also, if the government reduces the subsidy
on domestic gas consumption which in turn results into increase in prices of gas for the
customer, the billing rates to the distributors does not change unless an extraordinary
situation. Major share of distributors’ inventory is held in form of this domestic
denomination of 14.2 kilogram unit. The domestic cylinder has a selling price of Rs. 325
to the end customer.
The commercial market (also known as bulk market) is highly price sensitive as it is an
open market. The petroleum companies in the country jointly announce rates of gas every
month for the commercial usage. Bulk customers are restaurants, hotels, catering service
providers, industrial manufacturing firms etc. The distributors are also allowed a fixed
incentive on each denomination in commercial category which is fixed by the petroleum
company based on market conditions, competition in the region and volumes of sales.
The amount of incentive ranges from Re. 0 to Rs. 65 per denomination. But this does not
remain constant. So distributors cannot rely on this incentive always.
And further more, sometimes to survive competition pressure, the distributors also pass on
this incentive partly to the customer. Here, the 19 kilogram denomination has a bigger
market share. Hence, the distributors are required to store it in sufficient though small
quantities. But the other two denominations, 35 kilograms and 47.5 kilogram units are not
stored by the distributors. They are ordered as and when the customer has placed a
requirement. Delivery takes place directly from the company’s dispatch point to
customer’s place, having no extra delivery cost to be incurred by the distributor. RGS
presently has a sale of 250 cylinders of 19 kilogram unit, 50 cylinders of 35 kilogram unit
and 25 cylinders of 47.5 kilogram unit in a month. The selling prices in the commercial
segment are Rs. 1,050 for 19 kilogram; Rs. 1,935 for 35 kilogram and Rs. 2,625 for 47.5
kilogram denomination respectively. The amount of incentive for last month is Rs. 15 per
19 kg unit, Rs. 30 per 35 kg unit and Rs. 55 per 47.5 kg unit for the last month.
Raj has also scrutinized past cost records and has summarized the following elements of
cost for an average month’s operations:
Amount
(Rs.)
Office Staff Salary 80,000
Electricity Expenses 12,000
Telephone Expenses 4,000
Depreciation of office & warehouse premise 15,000
Other Miscellaneous expenses 5,000
Delivery staff salary 34,000
Fuel & Depreciation on delivery vehicle 50,000
Total 2,00,000
Increasing competition resulting from new entrants in the industry, regulators’ proposed
policy of removing the subsidy from domestic segment and increasing operating costs in
domestic segment because of better service demand are key issues concerning Raj about
his business. He wants to plan financial performance in such a way that he has clear idea
as to how many units of each category must be sold in order to break even. Raj described
specific concerns of his business as follows:
2. So far RGS has not passed on any incentive to customers in commercial segment.
But because of increased competition he anticipates that sales of 47.5 kg unit will
entail parting incentive with the customer. The amount of incentive is likely to
remain same as of last month. What is the effect of passing on commission on
profits and break-even levels, assuming that entire sales of 47.5 kg unit entails an
incentive of Rs. 25 per unit to be passed on to customers? If he wants to maintain
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4. Raj is thinking of employing two salesmen for the 35 kg unit commercial segment
who can promote sales and can reach out to new customers. These salesmen will
be paid a salary of Rs. 5,000 per month per salesman. He wants to fix up a monthly
target of sales for these salesmen in such a way that initially just the additional cost
of their salaries can be recovered over and above the current costs. He also wants
to know the levels of break even in such a situation. He has also given a thought to
a compensation combination of Rs. 2,500 per month fixed
salary per salesman plus a commission of Rs. 3 per unit sold through them. Again
has above mentioned queries. At which levels of output the above two plans are
indifferent?
5. Raj is willing to figure out the sales (in volume & value) that earns a profit of Rs.
5,00,000 in the next month.
6. Raj has explored new market opportunity in domestic segment. But can explore it
only at the cost of the ‘commercial’ segment business. Discontinuing commercial
segment business will not attract any financial or non-financial penalty from the
petroleum company. In such a situation, he will save Rs. 20,000 a month of fixed
cost. He wants to know the effect of discontinuing commercial segment business
on break-even levels and profits, assuming current levels of sales. At what levels
of volumes in new market should he be doing business?