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    Case 2 - Cost - Sheet - Pepe - Denim PDF

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    KrutarthChaudhari
    1) The chairman of Pepe Denim was facing pressure to improve profits as they had been declining despite consistent sales. 2) He called a meeting with the cost accountant and marketing manager to understand costs and the market. 3) The cost accountant reported profits were expected to decline further due to rising costs and competition. 4) The marketing manager suggested adding denim skirts and handbags to attract new customers and increase sales without much extra cost. 5) After one year, profits had risen by 4.25% with the new products, satisfying the chairman.

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    Case 2 - Cost - Sheet - Pepe - Denim PDF

    Uploaded by

    KrutarthChaudhari
    195 views3 pages
    1) The chairman of Pepe Denim was facing pressure to improve profits as they had been declining despite consistent sales. 2) He called a meeting with the cost accountant and marketing manager to understand costs and the market. 3) The cost accountant reported profits were expected to decline further due to rising costs and competition. 4) The marketing manager suggested adding denim skirts and handbags to attract new customers and increase sales without much extra cost. 5) After one year, profits had risen by 4.25% with the new products, satisfying the chairman.

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    1) The chairman of Pepe Denim was facing pressure to improve profits as they had been declining despite consistent sales. 2) He called a meeting with the cost accountant and marketing manager to understand costs and the market. 3) The cost accountant reported profits were expected to decline further due to rising costs and competition. 4) The marketing manager suggested adding denim skirts and handbags to attract new customers and increase sales without much extra cost. 5) After one year, profits had risen by 4.25% with the new products, satisfying the chairman.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    195 views3 pages

    Case 2 - Cost - Sheet - Pepe - Denim PDF

    Uploaded by

    KrutarthChaudhari
    1) The chairman of Pepe Denim was facing pressure to improve profits as they had been declining despite consistent sales. 2) He called a meeting with the cost accountant and marketing manager to understand costs and the market. 3) The cost accountant reported profits were expected to decline further due to rising costs and competition. 4) The marketing manager suggested adding denim skirts and handbags to attract new customers and increase sales without much extra cost. 5) After one year, profits had risen by 4.25% with the new products, satisfying the chairman.

    Copyright:

    © All Rights Reserved
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    of 3

    MIT WPU School of Management (PG)

    CASE STUDY #2 ON COSTING IN PEPE DENIM

    Kesar Bajaj (Bajaj), chairman of Pepe Denim, a manufacturer and retailer of jeans in India, was
    facing tremendous pressure to improve the financial position of the company and its market
    valuation.
    Bajaj and his younger brother Dinkar had floated Pepe Denim as a private limited company in
    Ahmedabad, Gujarat, in 1984. In 1994, the brothers decided to convert the company into a public
    limited company. Pepe Denim began manufacturing operations with just one factory in
    Ahmedabad district but the brothers put in a lot of hard work and took the company to a level
    where in 2011, it had 300 stores spread throughout the country and a workforce of 20,000. It also
    used to export its jeans to China, Brazil, and Nepal.
    Till 2007, the company did very good business with its sales increasing every year. It earned
    exceptional growth in valuation resulting from an increase in the company’s stock prices. After
    2007, however, the stock prices of the company started to decline even though sales continued to
    be consistent. Though there was no decrease in sales, the profits began to fall. The brothers
    thought that the decline in the stock prices and profits was due to the economic slowdown and
    recession. Since there was consistency in sales, they concluded that the profits were declining
    because of the increase in costs due to inflation. But the stock prices of the company remained flat
    and profits continued to decline even after 2010 when the economy had started reviving, stock
    indices had started rising, and the stock prices of other companies had also started soaring.
    The shareholders of the company raised concerns over the declining profits of the company. As a
    result of a heated shareholders’ meeting, Bajaj came under pressure to improve the company’s
    financial position and its market valuation. In order to understand the present status of production,
    costs, sales, and the future prospects of the company’s product in the market, he immediately
    called Vipin, the company’s cost accountant, and Sneha, the marketing manager. Vipin furnished
    the following cost information (Refer to Exhibit I) for the year ending March 31, 2010, and the
    changes in costs which were expected in the coming year:
    Exhibit - I
    Production and Sales - 1500000 units (in 000s)
    Sales - 1500000
    Direct Wages- 270000
    Direct Materials - 330000
    Factory Overheads- 325000
    Administration overheads- 205000
    Sales overheads- 90000

    On account of intense competition, the following changes were estimated in the subsequent year:

    1. Production and sales activity would be increased by one third.


    2. Material rate would be lowered by 25%. However, there would be a 20% increase in
    consumption which would take care of the increase in production level.
    3. Direct wages cost would be reduced by 20% due to automation.
    4. Out of the above factory overheads (given in Exhibit I), Rs. 45000 were fixed in nature. The
    remaining factory expenses would be variable in proportion to the number of units produced.
    5. Total administration expenses would be lowered by 40%.
    6. Sales overhead per unit would remain the same.

    On the basis of cost and profit estimation for the years ending March 31, 2010, and March 31,
    2011, Vipin told Bajaj that 6 % decline in profit on sales was expected in 2011. Bajaj realized from
    Vipin’s report that the reason for the decline in profits despite the consistent increase in sales
    volume was the heightening competition from other brands in the market. Since Sneha was in
    direct contact with the market, Bajaj asked her to carefully analyze the potential of the company’s
    product in the market and suggest the options available to overcome the problem. He gave Sneha
    10 days’ time to do this. After 10 days, Sneha reported back to Bajaj. In order to carry out a formal
    analysis of the options available with regard to business opportunities, Bajaj immediately called a
    meeting with the board of directors and asked Vipin and Sneha to be present.
    Addressing the meeting, Sneha said that in order to overcome the problem, Pepe Denim needed to
    attract new customers and sell more goods to repeat customers. She said the company needed to
    add new product lines; however, in order to keep costs down, the product lines had to be such that
    they would not require much additional cost. She suggested two new products which would
    require the same type of material and similar labor, and would serve the female segment of the
    market. Sneha said the two products which could be added easily were Denim Skirts and Denim
    Handbags for women as these two items would require the same raw materials. Besides, with a
    little training, the same tailors could undertake the stitching activity.
    After examining the suggestion, Bajaj thought that the two products would be a good strategic fit
    for the existing product line. He sought the opinion of the board of directors and they too gave a
    favorable response. With this, it was decided that the company would add these two products as
    soon as possible.
    After one year of the introduction of the two products i.e. on March 31, 2011, Kesar called Nihit
    the CFO (Chief Finance Officer) of the company, to find out about the company’s profitability and
    asked him to present Pepe Denim’s income statement. Nihit brought a summarized income
    statement which was as follows:
    Exhibit II: Income Statement of Pepe Denim for the year ending March 31, 2011

    Particulars Details Amt. (in 000s)


    Sales 2000000
    Less: Cost of goods sold 1263450
    Gross Profit 736550
    Less: Indirect expenses
    Office expenses 129150
    Selling and distribution expenses 126000 255150
    Net Profit before depreciation 481400
    Less: Depreciation 16400
    Net Profit after depreciation 465000
    Less: Tax (40%) 186000
    Profit after tax 279000
    From the income statement, Bajaj calculated the profit before tax percentage on sales and it
    worked out to be 23.25 — 4.25 per cent higher than the previous year’s profit. This improvement
    in profit gave him some satisfaction and he was eager to know how the new products were
    performing and what their cost structures were. He asked Vipin to present the cost sheet of Denim
    Skirts and Denim Handbags. Vipin was not ready with the cost sheets and so presented the
    following cost details of all the products:
    Exhibit – III (Amount in 000s)
    Denim
    Particulars Jeans Denim Skirts Handbags
    Stock of materials as on April 1, 2010 200000 ……….. ………..
    Stock of materials as on March 31, 2011 150000 75000 25000
    Material purchased during the year 600000 300000 100000
    Sale of material (not suitable) 25000
    Work-in-progress as on April 1, 2010 100000 ……….. ………..
    Work-in-progress as on March 31, 2011 35000 10000 5000
    Finished Stock as on April 1, 2010 350000 ……….. ………..
    Finished Stock as on March 31, 2011 450000 200000 120000
    Salaries (Factory) 15350 10000 5000
    Office salaries 25000 15000 5000

    Denim
    Particulars Jeans Denim Skirts Handbags
    Carriage on purchases 12000 000 2000
    Carriage on sales 13000 5000 2000
    Cash discount allowed 1800 550 400
    Bad debts written off 8000 1500 500
    Repairs of plant, machinery, and tools 8000 4000 1600
    Rent, rates, taxes, and insurance (factory) 12000 6000 2000
    Rent, rates, taxes, and insurance (office) 2000 700 300
    Traveling expenses 7000 5000 3000
    Traveler’s salaries and commission 20000 13000 7000
    Productive wages 300000 120000 180000
    Depreciation written off on plant, machinery, tools 9000 3000 2000
    Depreciation written off on office furniture 1800 400 200
    Director’s fees 15000 7000 3000
    Dyeing and water charges (factory) 3000 1500 500
    Gas and water charges (office) 850 300 100
    General charges 12750 5000 3000
    Manager’s salary (Office) 8000 5000 2000
    Manager’s salary (factory) 10000 6900 5000
    Advertising 28000 21000 8750

    Required:
    1) Vipin told Kesar Bajaj that a 6 % decline in profit on sales was expected in 2011. If the given
    information is correct then what would be the selling price of a pair of jeans for the year
    ending March 31, 2011?
    2) Can you help Kesar Bajaj in getting the total cost estimate of all the three products – Jeans,
    Denim Skirts, and Denim Handbags? If yes, what is the total cost of all three products?
    3) You are required to reconcile the profit with the Income Statement.
    4) Do you think the decision of the company to add two new products was beneficial? If yes,
    how?

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