Reference no: EM132992080

Question - A Company manufacturing a consumer product and marketing it through its network of 400 depots all over the country is considering closing down the depots and resorting to dealership arrangement. The total turnover of the company is Rs. 200 crores per annum.

The average turnover, costs etc. in respect of a depot are given below-

Annual turnover Rs.50 lakhs

Average inventory Rs. 5 lakhs

Admin expenses Rs. 50,000 per annum

Staff salary Rs. 80,000 per annum

The inventory carrying cost is 16% p.a., which is the rate for working capital finance.

Marketing through dealers would involve engaging dealer for each area. The products shall be sold to the dealers on 'principal to principal' basis. The dealers will assure a minimum sale for each area. This would result in increasing the capacity utilization from 75% to 90%. The company's P/V ratio at present is 10%. The current profit is Rs. 1.50 crores. Corporate fixed costs Rs. 10.10 crores are allocated to depots and will remain unaffected in case of dealership arrangement.

Marketing through dealers would involve payment of commission of 5% on sales. 50% of the existing depot staff will have to be absorbed in the company. The dealers will deposit Rs. 5 crores with the company as security deposit, on which 12% interest p.a. will be paid.

Required -

a) Giving proper working notes, prepare statement of profitability under both the options viz. 'Depots' and 'Dealers'.

b) Based on the profitability statements, do you recommend the change from depots to dealers?

c) What will be your reaction if the dealers are willing to accept commission @ 4% on sales (other factors remaining unchanged).

d) What other non-financial considerations should be kept in view in arriving at the decision.

e) Mention (don't explain) the various Management Accounting concepts involved in decision making process.