INDUS CRAFTS- AUTHOR- SAKINA NISAR

CO AUTHOR- GHULAM ALI

DECISION MIX DILEMMA SUPERVISOR- SAJJAD MAHESAR
AGENDA
INTRODUCTION OF CASE
USES OF THIS CASE
CASE OBJECTIVES
TEACHING OBJECTIVES
TEACHING STRATEGIES
DILEMMA
OPTIONS
ASSIGNMENT QUESTIONS
ANALYSIS
INTRODUCTION OF CASE
Founded in Shikarpur as NGO in 2010 by Mr. Zahid Hussain Abro
To empower the socioeconomic wellbeing of local handicraftsmen of Sindh
Product line includes 3 products namely Sindhi Cap, Ajrak and Ralli Quilt
1 training centre at Shikarpur and Ajrak manufacturing workshop at Hala
Local and International customer base
Business through E-commerce
Generally operates at 70% capacity
Market trends are shifting towards alternative uses of Ralli and Ajrak
 USES OF THIS CASE

SUBJECTS
Principles of Managerial Accounting
Financial Management for Non-Financial Executives
Management Accounting & Control Systems

CLASSES
BBA, BS-Accounting & Finance, MBA

CONCEPTS
Relevant Information for Pricing Decisions
Relevant Information for Operational Decisions
Cost, Price and Sensitivity Analysis
Optimum Profit Maximization through Limiting Resources
Multiple Breakeven Analysis
CASE OBJECTIVES
To introduce the idea of reflexive reasoning (i.e., conducting an analysis from a
competitor's point of view) and to recognize that the information necessary for
that analysis can be reasonably estimated.
To use a decision, summarize and structure the various alternatives and
consequences of a decision and to recognize that, among other things, a decision
depends on the decision maker’s assessment of the uncertain future and tolerance
for risk
To introduce/review the concept of relevant costs, to understand the impact of
not distinguishing between fixed and variable costs
To suggest that an appropriate role for a useful analysis is to have framed the
issues better and, as a result, to have raised insightful questions, possibly more
than the number of answers provided
LEARNING OUTCOMES
Designed to analyse different theoretical concepts of Managerial Accounting
Profit planning through contribution margin approach
Provides easy understanding of concepts of fixed and variable costs
Demands sound reasoning for choosing a particular profit plan
Analysis of relevant and irrelevant costs to decision making
Understanding of resource optimization and impacts of capacity constraints on
decision making
Drives the focus towards product development and market growth
Product mix based on optimal profitability
 TEACHING STRATEGIES
2 approaches to solve the case
Decision or factual
Contribution margin approach
Evaluate options on the basis of contributions and profitability in terms
of their qualitative impact on long term sustainability of the company
Make the case more complicated by combining 2 or more options to see
their cumulative impact on profitability
Use own knowledge and understanding while teaching this case
This case is designed to run in a 90 minutes class
DILEMMA
Zahid is concerned about the sustainability of his company in the presence of
low demand and capacity constraint of its product line
The demand of Sindhi cap is low and it has no alternative use
The profitable product has low contribution margin and vice versa
OPTIONS
Whether to accept special order
Accept the emergency order from regular customer
Could he chase breakeven level without special and emergent order
Is it right time to close production of cap
Is it right time to penetrate in New market with different pricing and
promotional strategies
ASSIGNMENT QUESTIONS
Calculate the sales mix breakeven for Indus-crafts?

What would be the impact of dropping Sindhi cap from its product line while keeping
the volume and selling price of the other two products as same?

If he decided to decrease the price of Ralli by Rs.4000 and thereby demand would
increase by 175 units then how it would impact the overall profitability?

What would be the impact of changing the focus of advertising from Sindhi cap to
Ralli quilt if doing so would increase the demand of ralli by 125 units and decrease the
demand of cap by 50 units?
ASSIGNMENT QUESTIONS
What would be the impact if he choose option 3 and 4 simultaneously thereby
increasing the overall demand of ralli by 275 units and decreasing the demand of
cap by 50 units?
Zahid also wanted to know if he considers special order and its impact on the
profitability of the company.
Should Zahid take the order given by regular customer? If yes then how would it
impact the company’s profitability? If no then what would be the impact of this
deal on its future relationship with this customer?
By considering current market and industrial analysis, Zahid wanted to know
the future strategy of Indus-crafts whether they should go for a new target market
with alternative product usage or remained stick with their current line of 3
products?
 QUESTION 1- Calculate the sales mix breakeven for
Indus-crafts?
ITEMS CAP AJRAK RALLI TOTAL
UNITS 525 1050 1925 3500
SALES MIX 15% 30% 55% 100%
SELLING PRICE 3500 3000 5000 -
VARIABLE COST 2450 1950 3250 7650
CONTRIBUTION 1050 1050 1750 3850
MARGIN
WACM 157.5 315 962.5 1435
FIXED COST 366406 885718 2698500 3950625
BREAKEVEN 413 826 1514 2753
UNITS
BREAKEVEN 1445351 2477744 7570884 11493979
SALES
QUESTION 2- What would be the impact of dropping sindhi cap from its
product line while keeping the volume and selling price of the other two
products as same?
QUESTION 3-If he decided to decrease the price of ralli by rs.4000 and
thereby demand would increase by 175 units then how it would impact the
overall profitability?

ITEMS UNITS REVENUE PROFIT

NORMAL UNITS 1925 9625000 670250
INCREMENTAL 2100 8400000 572250
UNITS

DIFFERENCE 175 (1225000) (98000)

QUESTION 4- What would be the impact of changing the focus of advertising
from sindhi cap to ralli quilt if doing so would increase the demand of ralli by
125 units and decrease the demand of cap by 50 units?

ITEMS CONTRIBUTION PROFITS

MARGIN
PREVIOUS 11462500 847281
PRODUCTION
NEW PRODUCTION 11912500 864468

INCREMENTAL 450000 17187

DIFFERENCE
QUESTION 5- What would be the impact if he choose option 3 and 4
simultaneously thereby increasing the overall demand of ralli by 275 units
and decreasing the demand of cap by 50 units?

ITEMS CONTRIBUTION PROFITS

MARGIN

PREVIOUS 11462500 847281

PRODUCTION

NEW PRODUCTION 9362500 660468

DIFFERENCE (2100000) (186812)
 QUESTION 6- Zahid also wanted to know if he considers special order and its impact on the
profitability of the company.

PRODUCTS CAP RALLI TOTAL

UNITS 100 100 200

CONCESSIONAL 2500 3500 -

PRICES

REVENUES 250000 350000 600000

VARIABLE COSTS 2450 3250 -

CONTRIBUTION 50 250 300

MARGIN

EXCESS CAPACITY 475 325

 QUESTION 7- should Zahid take the order given by regular customer? If yes then how would it impact the company’s
profitability? If no then what would be the impact of this deal on its future relationship with this customer?

PRODUCTS CAP AJRAK RALLI

CAPACITY 1000 1750 2250
ORDER 1200 1200
NORMAL 525 1050 1925
PRODUCTION
ALTERED CAPACITY 1200 1750 2050
ALTERED UNITS 1200 1750 1925
SELLING PRICES 3500 3000 5000
REVENUES 4200000 5250000 9625000
VARIABLE COSTS 2940000 3412500 6256250
CONTRIBUTION 1260000 1837500 3368750
MARGIN
FIXED COSTS 420000 1050000 2406250
OPERATING INCOME 840000 787500 962500
S&A EXPENSES 182656 255718 292250
NET INCOME 657343 531781 670250
QUESTION 7 CONTINUED
QUESTION 8- By considering current market and industrial analysis, Zahid wanted to
know the future strategy of Indus-crafts whether they should go for a new target market
with alternative product usage or remained stick with their current line of 3 products?

Moves towards related diversification

It requires investment in terms of new machinery and setup for a new product
line.
New labour should be hired and trained according to the new product line.
The advertising strategy should also be changed accordingly by tracking the
demand.
As the business grows so Zahid needs some permanent employees rather than
volunteers to run the business hence increasing further operating costs.
Zahid also wanted to know the trade-off between cost and profitability of
including new product line.
THANK YOU