Gupchup Expansion Industries Ltd

About the Company Engaged in manufacturing and marketing activities. Factories located in 12 cities with the sales turnover of Rs. 50 crores. Experiencing rapid expansion and with present growth rate, expected sales volume to exceed Rs. 7 crores Management wants to implement profit center concept for better planning and controlling.

Q1. How do you distinguish profit center from service center? PROFIT CENTRE Profit centers concentrate on difference between input and output, which can be measured in financial terms. Measurement of profit centre depends on measurement of efficiency and effectiveness. It is that department whose manager responsible for cost as well as revenue of department measured in monetary terms. A profit center manager is held accountable for both revenues, and costs (expenses), and therefore, profits.

SERVICE CENTRE Service centers supply services to the business units and bill back the costs. Service centers provide and guidance to line managers In service centers, output cannot be measured in financial terms.

Outline the basic consideration in determining a profit center? The input and output are both measured in financial terms. Managers should have access to relevant information for making decision. It considers performance measuring criteria It is made at lowest possible management level. The cost of creating profit centre should not be higher than the benefits derived in the long run. For profit centre, the quantitative information may be enough for performance.

Q2. Outline the profit centers in the above company? Material division : Vendor Development programme Junk cell Manufacturing division : Consultancy services Marketing Division

Materials Division This can be the profit center since it incurs cost in the form of purchasing the materials required by various factories. On the other hand, its junk cell department is responsible for purchasing junk steel consumer products, reconditioning them and then selling them to outside contractors. INPUT OUTPUT Purchase of Materials = Rs.2900 lacs Sales = 5000 lacs Purchases made from ancillary units = Rs 725 lacs

Marketing Division Can be converted to profit center by charging it with the cost of product sold. Sales office also functions as godowns, so there can be transfer pricing from marketing division to materials division Transfer pricing provides marketing manager with relevant information to make optimum revenue-cost trade off. Material Division Marketing Division Transfer Pricing INPUT OUTPUT

Manufacturing Division In this department the managers are responsible for cost spending like generating information on new products, new process, design and development, technical feasibility & economic feasibility studies etc, so it functions as a cost center. To measure its activity this can be turn it into profit center. It is good since factor influencing volume & mix of sales are beyond manufacturing manager control.

Profit Center can be measured as: Revenue (-) Cost of Sales (-)Variable Expenses Contribution Margin (-)Fixed Expenses Direct Profit (-)Controllable Charges Controllable Profit (-)Other Corporate Allocations Income before tax (-)Tax Net Income

Exhibit 1 Managing Director GM (Materials) RM procurement Vender Development unit Volume Engineering Junk Cell GM (Manufacturing) Industrial Engineering Process know- how R&D GM (Finance) Financial Accounting Industrial Audit Revenue & Taxation Mgt Accounting & Reporting GM (Administrative) Industrial Relation & PR Recruitment Personnel Planning & Development GM (Marketing) Export Executive Advertising Mgr MR Mgr

Exhibit 2 Product lineSales (Rs lakhs)GovernmentInstitutionsWholesalers/ Retailers, etc Trading line % Leather Products (Exports) Defense Equipment150100%-- Old Steel Products (Reshaping) Packing (Internal use Only) Typewriters30020%70%10% Electronic Motor %60% Electronic Lamps45020%30%50% Decorative Glass250-80%20% Printing, Writing25010%20%70% Canning150-20%80%

Contd.. Cycle Seats %- Sanitary ware %40% Biscuits %90% Fans 15025% 50% Detergents 20020%40% Printing Press %- Wire Products %20% Locks & Safes 10010%30%60% Pesticides 15030%40%30% Total5000

Exhibit 2 (a) CitiesProducts LudhianaReconditioning of old steel products on contract basis KanpurLeather products for exports BhavnagarCanned foods & biscuits CuttakPacking materials VijaywadaBiscuits AurangabadDefense equipment HubliLocks, Safes & wire products; cycle seats CochinDetergents & pesticides, inks, gums & paints MaduraiElectric lamps & bulbs GwaliorSanitary ware/ Porcelain & Decorative glass PoonaElectric motors fans CalcuttaPrinting press & typewriters

Exhibit 3 – Summary of Income Statement Net Sales Revenue (net of packing)4750 Consultancy & Services Costs : Materials 2900 Labour 600 Manufacturing Overheads Gross Profit800 Less : Selling & Distribution Expenses300 Profit Before Tax500

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