Effect of loss of product (Appendix)

Subject:AccountingPrice:2.84 Bought7

Share With

Effect of loss of product (Appendix). Innova Machines (Pvt) Limited, located in Chennai, India, supplies automotive components to two-wheeler (scooters, motorcycles, mopeds, and such) manufacturers. A dozen major customers located within India account for most of its sales. The largest customer accounted for 20% of the sales, and the smallest accounted for about 6% of the sales volume. As elsewhere in the world, the market for automotive components is extremely competitive, and price is the key determinant of which supplier gets the order. For 2010, management estimated materials cost at Rs. 80,000,000 (Rs. denotes Rupees—Rupee is the Indian currency), labor at Rs. 120,000,000, and manufacturing overhead at Rs. 75,000,000. The (industry) standard of 15% markup on manufacturing cost yielded total revenue of Rs. 316,250,000. The firm made a modest profit after accounting for selling and administration expenses. One of Innova's smaller customers (accounting for 8% of sales) went bankrupt and closed at the end of 2010. Innova's management tried hard to replace the business but was unsuccessful, and budgeted manufacturing overhead at Rs. 72 million for 2011. They then computed prices based using the standard markup. Despite heroic efforts from its sales force, the firm lost another customer in 2011—a customer who accounted for 15% of 2010 sales. Despite another saving of Rs. 7 million in budgeted overhead costs for 2012, it appeared that the firm had succumbed to nimbler competitors making the product at lower cost.