Case Study On Xyz Forgings Financial Proj.

CASE STUDY ON OPERATING ECONOMICS M/S XYZ FORGINGS LTD. XYZ Forgings Ltd. is a proposed unit for the manufacture of various types of forgings. 1.Estimated Sales Three kinds of forgings are to be manufactured viz. Rough forgings, heat treated forgings and machined forgings. The total estimated sales of these forgings is expected to rose from a level of 1000 MT per year in the first year to 2000 MT per year in the third year. 2 The type – wise breakups of sales in (MT) is expected to be as: I YEAR II YEAR III YEAR Rough Forgings 300 400 500 Heat Treated Forgings 500 800 1000 Machined Forgings 200 300 500 Total 1000 1500 2000 3. Selling price: The sales price per MT of the different types of forgings would be Rs. 30,000/- per MT for rough forgings, Rs. 35,000/- per MT for heat- treated forgings and Rs.40,000/-per MT for machined forgings. On the sales at this price a discount/ commission of 5% is to be paid to dealers. 4. Physical Requirements: A. Plant for the expected sales turn over is expected to require investment in various assets as indicated below: 1. Land of total area of about one acre costing Rest. 3,00,000/2. Building for Factory and Office: The factory building of area 100’ x 40’ is to be constructed and the cost of construction is estimated to be Rs. 150/- per sq. ft. Office building of area 40’ x 20’ would have to be constructed @ Rs. 400/- per sq. ft. Additional structures to be made will cost another Rs.2,50,000. 3. i) Machinery for processing costing Rs.25.50 lacs inclusive of pre- furnace costing Rs.2.50 lacs and Heat Treatment Furnace costing Rs.10 lacs. ii) Workshop equipment costing Rs.10 lacs. iii) Inspection and Testing equipment etc. Rs. 5 lacs iv) In addition to the above an investment of Rs 1 lac is to be invested for miscellaneous assets like furniture, fittings, office equipments etc. 5. Operational Requirements: Process : The stages in manufacturing of different types of forgings is outlined below: a) Rough forgings – Heating in pre-furnace, forging in forge shop, heat treatment in the heat treatment furnace. b) Heat treated forgings – Heating in pre-furnace, forging in forge shop, heat treatment in the heat treatment furnace. c) Machined forgings – Heating in pre-furnace, forging in the in the forge shop, machining in the machine shop.

Raw Materials: Raw materials used are Carbon Steel and Mild Steel. Mild steel used in Rough and machined forging costs Rs.16,000 per MT and carbon steel used in Heat treated forgings cost Rs. 20,000 per MT. To allow for waste, rejections etc. 1.10 MT of raw materials per MT of finished products. Consumables: a) Furnace Oil – This is used in the furnaces. In pre-furnace, 1000 litres of furnace oil are required for every 5 MT of products processed. In the Heat treatment furnace, 1000 litres of furnace oil are required for every 10 MT of product processed. Furnace oil is bought at a rate of Rs.10 per litre. b) Coal- Coal is required for boiler which provides steam for the hammers in the forge shop. The annual consumption of coal is expected to be 1250 MT per annum and is bought at Rs.2,000/- per MT. c) In addition, machinery spares and lubricating oil etc. would be consumed , the annual cost of which are assumed as Rs.1,00,000. Labour: 1. Most of the work is done through the employment of contract labour. 2. Contract labour in the forge shop is to be paid Rs. 2,000/- per MT of forged product. 3. In addition, contract labour is also hired for the heat treatment shop and are paid Rs.1500/- per MT of heat treated product for this part of work ( heat treatment ) 4. Apart from contract labour, a fixed complement of workers are required for the workshop. Wages to this complement would amount Rs. 2.50 lacs per annum. Other Expenses: 1. Other administrative expenses are estimated to be as follows: Rs. i) Office salaries 5,00,000 ii) Postage, stationery, printing etc. 50,000 iii) Conveyance, freight etc. 1,50,000 iv) Miscellaneous Expenses 40,000 Total 7,40,000 2. In addition, repairs and maintenance costs are estimates to be 2% of value of plant & machinery. 3. Depreciation will have to be charged at 5% on building, 20% on furnace, 10% on other plant & machinery ( except furnaces ) and 10% on other miscellaneous assets. 4. Stocks and Bills It is considered necessary to carry average stock of raw materials, furnace oil and coal for 2 months, finished goods for 2 weeks,. Bills are expected to be cleared on the average after a period of 2 weeks.

5. Bank’s Finance Bank’s finance would be available towards both fixed assets and working capital with interest at 18 % p.a. 6.The margins to be met from own source are as below:- % a) Land & Building 33 1/3 b) Plant & Machinery 25 c) Miscellaneous assets 20 d) Raw materials, furnace oil & coal 25 e) Finished Goods 30 f) Bills 10 g) Expenses 100 Repayment of Term Loan In 5 yearly instalments of Rs. 8 lacs each with a moratorium period of 2 years.

Based on the information given above: (a) Compute the total project cost and the quantum of Bank finance available towards meeting this. (b) Prepare the statements of profitability, working capital requirements and Break even analysis.