Particulars Light (2.

5 crore units) Regular (2 crore units)

Material 2.4 3.4

Labour 0.2 0.4
Variable Manufacturing overheads 0.6 0.9
Fixed manufacturing overheads 0.4 0.5

Marginal cost per unit 3.2 4.7

Inventory
Material 0.12 0.17 3400000
Work in Progress 0.136 0.196 3920000
Finished Goods 0.16 0.235 4700000

Accounts Receivable 0.32 0.47 9400000

Inventory Holding 0.736 1.071

Cost of Carrying 0.082432 0.119952 2060800

Question 1

Incremental cost of producing one unit of diaper

Is the same asmarginal cost of one unit

Question 2

Relevant cost of working capital loan 0.736 1.071

Question 3

Relevant cost of term loan

Term loan from Balance Sheet
Rs. 3 crore
0.0466666666666667
How much to be allocated to the diaper
business? nil nil 0.035

Question 4

For export purpose, equipment to be purchased at 1 crore

What is the NPA of the project assuming that the diapers can be exported at Rs.5.8

Particulars 0 1 2 3 4

Capital Equipment -10000000

Working capital -21420000
Contribution= Sales -Variable cost 22000000 22000000 22000000 22000000
Less Fixed cost 10000000 10000000 10000000 10000000
Depreciation on equipment 1000000 1000000 1000000 1000000
Profit 11000000 11000000 11000000 11000000
Profit after tax 7700000 7700000 7700000 7700000
Cash flow -31420000 18700000 18700000 18700000 18700000
IRR 59%
NPV 266609380
Discounted cash flow 298029380

Cash flow for light diaper

Contribution 20000000
Less Fixed cost 10000000
Profit 10000000
Profit after tax 7000000
Cash flow for 10 years 270935800

Both of the above result in positive cash flows

Should he go in for exports at 5.8 or local co branded at Rs.4/-

Use the data given and think of the reasoning

Raman Aditya

Indian market because Export because

Market size Developed market

First mover Cost advantage
Cost advantage Exchange risk
Additional channels (e commerce) Country risk
Possibility of increasing SP Additional cash flows?
Government incentives
Established supply chain
Cons
Quality norms stringent
Supply chain risks
Exhibit 3

Material requirement for 15 days was to be kept in stock

Work in process amounted to material (100% complete) and conversion (40% complete) of 15 days

Cherian would keep 15 days’ worth finished goods in his warehouse

Credit period required by him is 30 days

Assume 300 days in a year for all the above calculations

Pretax interest cost on working capital is 16% Assume tax rate of 30%

1.     Calculate the incremental cost of producing one unit of light and regular diaper (4 marks)
2.     Calculate the relevant cost of short term capital to produce one unit of light diaper (4 marks)
3.     Calculate the relevant cost of term loan to be allocated to a unit of output of the regular diaper (2 marks)
4.     What does the conventional capital budgeting analysis result in for the regular diaper? (Go or no go?) (6 ma

5 6 7 8 9 10
22000000 22000000 22000000 22000000 22000000 22000000
10000000 10000000 10000000 10000000 10000000 10000000
1000000 1000000 1000000 1000000 1000000 1000000
11000000 11000000 11000000 11000000 11000000 11000000
7700000 7700000 7700000 7700000 7700000 7700000
18700000 18700000 18700000 18700000 18700000 40120000
per (4 marks)
regular diaper (2 marks)
diaper? (Go or no go?) (6 marks)