Harsh Electricals: Analyzing

Cost in Search of Profit

GROUP 9: SECTION A

Aditya Kumar: 20P004

Himanshi Vardhani: 20P022
Sachin Heda: 20P047
Shivam Singla: 20P055
Kerfegar Dalal: 20P030
Devinder Kumar: 19FPM131
 Situational Analysis
● Mr. Madhusudan Gupta, founder of Harsh electricals had been a specialist supplier of home appliances in
Andhra Pradesh
● Initially, he invested Rs. 8,00,000 in the form of equity to begin his business to business trading in 2008
● The business was a huge success and sales reached Rs. 4 million and post tax reached Rs. 6,50,000 for
financial year 2008-2009.
● In FY 2009-10. he expanded his business in neighboring states of Maharashtra and karnataka
● The business performed well till FY 2010-11 and dropped in next 2 consecutive years FY 2011-2012 and FY
2012-13
● The decline in financial performance can be attributed to two major reason:
(a) Decline in profit margin due to the increased marketing and servicing cost
(b) Surge in post repairs and replacement costs due to inferior quality of products
 Situational Analysis
● The number of manufacturers who were providing quality products could fulfill demand of only 30-40% of
demand
● For sustainable growth of his business, he considered shifting the focus of his business to manufacturing
quality appliances
● The competitive strategy of Harsh Electricals was to manufacture fibre air coolers with high cooling capacity
at a competitive price.
● Mr. Gupta onboarded Mr. N Nagesh, an industrial engineer and a skilled mechanical expert
● Both concluded to manufacture two different models of fibre air coolers- Standard Model and Baleno
model.
COST ANALYSIS
Manufacturing Costs: Fixed
Costs
Raw Material Cost:
● Stable for the production of each cooler unit and changes proportionately with the total
volume of production
● Procured 40% raw materials from suppliers at a credit of 15 days and rest was procured on
cash
● Firm had a moderate working capital policy
● Fixed order inventory management system where supplies were reordered only when the stock
reached a previously set minimum limit
Manufacturing Costs: Fixed Costs
Continued
Labor Cost:
● Required 5 casual workers on a daily basis to run the assembly line for the production of 40
units
● Casual workers required for 8 hours each day at a minimum wage of ₹200 per day
● Standard & Baleno model were expected to consume 60 & 72 minutes of assembly line labor
respectively
● Staff member with a monthly salary of Rs 6,000 was also hired to set up the machines before
each production run and to handle the materials
Additonal Expenses
● Delivery of raw material from suppliers would come at an additional cost of 0.5%
● The cost for drilling remained constant at Rs 10 per cooler irrespective of the model of the
cooler to be drilled
● Fixed costs like rent were to be paid on a monthly basis while the drilling and assembly line
labor were to be paid every two weeks
● Electricity costs were Rs 10 per unit with a minimum bill to be charged for 1000 units per
month
● Fixed cost for workshop insurance at Rs 25000 per year
● Cost incurred on wires, screws, nuts and bolts, and oiling was estimated to be ₹45,000 per year
with an expected increase of ₹5,000 with every 1,000 subsequent units produced
Financials
Revenue
Price 2300
Profit Margin 15%
Cost Price 2000

Quantity Sold 4000 4500 5000

Revenue 9200000 10350000 11500000
Cost 8000000 9000000 10000000
Profit 1200000 1350000 1500000
NP Margin 13.04% 13.04% 13.04%

Segment Standard Model Baleno Model Total

Number of Units (during season) 3200 800 4000
Selling Price (in Rs) 2500 3000
Total Revenu during Season 8000000 2400000 10400000
Number of Units (during off season) 60 10
Total Revenue During off season 150000 30000 180000
Total Revenue segment wise 8150000 2430000 10580000
Total Revenue (in Rs) 10580000
 Per unit Cost
Labour Cost Standard Baleno
Baleno
Direct Materials Consumed 1778 2185
Casual Worker Expense Standard Model Model
Assembly Line Time (in Min) 60 72 Procurement Charges 8.9 10.9
Assembly Line Time (in Hrs) 1 1.2 Labor Cost 25 30
Number of Air-Coolers produced during season 3200 800 Drilling Bit 10 10
Number of Air-Coolers produced for off season 60 10 Electricity 10 10
Total Quantity Produced 3260 810
Prime Cost 1831.9 2245.9
Total Assembly Line Time (in Hrs) 3260 972
Payment for casual lobor ( per day 8hrs) 200 200 Raw Material
Per Hour Charge 25 25 Per Unit
Total Cost for Casual Workers (in Rs) 81500 24300 Component Standard Baleno
Body 650 830
Total Compensation for Casual Workers (in Rs) 105800 Motor 500 630
Pump 90 110
Blade, Clamp & Wiring 168 205
Total Salary Expense Amount Pipe, Water, Distributor & Panel Set 190 210
Nagesh's Salary 600000 Diverter 110 110
Staff Member Salary (6000 per month for 6 Packing 40 50
months) 36000 Wheel 30 40
Total (in Rs) 1778 2185
Casual Workers Salary 105800
Total Salary Expense 741800
Total quantity sold during season 3200 800
Total Quantity sold off season 60 10
Total Quantity 3260 810
Raw Material Cost per Unit 1778 2185
Total Raw material Cost per segment 5796280 1769850
Premium (0.5%) 28981 8849
Total Raw material cost 7566130
Procurement Cost 37831
 COGS
Amount
Direct Materials 7709761
Raw Material Cost 7566130
Direct Manufacturing Labor (Casual Labor) 105800
Procurement Expense 37831
Drilling Cost 40700
Manufacturing Overhead Cost 946150
Indirect Manufacturing Labor
Nagesh's Salary 600000
Supervisor's Salary 36000
Factory Electricity 115850
Depreciation on factory machinery, furnitures 64000
Consumables 4500
Factory Insurance 25000
Factory Rent 100800
Total COGS 8655911