&he company foresees further intensification of competition with the entry of se%eral foreign car manufactures many of them eing mar!et leaders in their respecti%e countries. &he small car segment especially( will witness entry of foreign ma'ors in the near future( with latest technology eing offered to the Indian customer. Company has ne%er defaulted on its loan payments and en'oys a fa%ourale face with its
&he company foresees further intensification of competition with the entry of se%eral foreign car manufactures many of them eing mar!et leaders in their respecti%e countries. &he small car segment especially( will witness entry of foreign ma'ors in the near future( with latest technology eing offered to the Indian customer. Company has ne%er defaulted on its loan payments and en'oys a fa%ourale face with its
&he company foresees further intensification of competition with the entry of se%eral foreign car manufactures many of them eing mar!et leaders in their respecti%e countries. &he small car segment especially( will witness entry of foreign ma'ors in the near future( with latest technology eing offered to the Indian customer. Company has ne%er defaulted on its loan payments and en'oys a fa%ourale face with its
Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment. It was set up 15 years ac! and since its estalishment it has seen a phenomenal growth in oth its mar!et and profitaility. Its financial statements are shown in "#hiits 1 and $ respecti%ely. &he company en'oys the confidence of its shareholders who ha%e een rewarded with growing di%idends year after year. Last year( the company had announced $0 per cent di%idend( which was the highest in the automoile sector. &he company has ne%er defaulted on its loan payments and en'oys a fa%ourale face with its lenders( which include financial institutions( commercial an!s and deenture holders. &he competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of se%eral foreign car manufactures many of them eing mar!et leaders in their respecti%e countries. &he small car segment especially( will witness entry of foreign ma'ors in the near future( with latest technology eing offered to the Indian customer. &he Zip Zap Zoom)s senior management reali*es the need for large scale in%estment in up gradation of technology and impro%ement of manufacturing facilities to pre+empt competition. ,hereas on the one hand( the competition in the car industry has een intensifying( on the other hand( there has een a slowdown in the Indian economy( which has not only reduced the demand for cars( ut has also led to adoption of price cutting strategies y %arious car manufactures. &he industry indicators predict that the economy is gradually slipping into recession. SUBJECT: Financial Management Marks:100 Exhibit 1 Balance sheet as at March 31,200 x (-mount in .s. Crore) /ource of 0unds /hare capital 150 .eser%es and surplus $50 200 Loans 3 4eentures (5 167) 50 Institutional orrowing (5 107) 100 Commercial loans (5 1$7) $50 &otal det 600 Current liailities $00 1($00 -pplication of 0unds 0i#ed -ssets 8ross loc! 1(000 Less 3 4epreciation $50 9et loc! :50 Capital ,I; 1<0 &otal 0i#ed -ssets <60 Current assets 3 In%entory $00 /undry detors 60 Cash and an! alance 10 =ther current assets 10 &otal current assets $20 +1$00 Exhibit 2 Profit and oss !cco"nt for the year ended March 31, 200x (-mount in .s. Crore) /ales re%enue (80(000 units # .s. $(50(000) $(000.0 =perating e#penditure 3 >ariale cost 3 .aw material and manufacturing e#penses 1(100.0 >ariale o%erheads 100.0 &otal 1(600.0 0i#ed cost 3 . ? 4 $0.0 @ar!eting and ad%ertising $5.0 4epreciation $50.0 ;ersonnel :0.0 &otal 125.0 &otal operating e#penditure 1(:25.0 =perating profits ("AI&) $15.0 0inancial e#pense 3 Interest on deentures :.: SUBJECT: Financial Management Marks:100 Interest on institutional orrowings 11.0 Interest on commercial loan 11.0 51.: "arnings efore ta# ("A&) 181.1 &a# (5 157) 26.$ "arnings after ta# ("-&) 11<.1 4i%idends :0.0 4et redemption (sin!ing fund oligation)BB 60.0 Contriution to reser%es and surplus <.1 B Includes the cost of in%entory and wor! in process (,.;) which is dependent on demand (sales). BB &he loans ha%e to e retired in the ne#t ten years and the firm redeems .s. 60 crore e%ery year. &he company is faced with the prolem of deciding how much to in%est in up gradation of its plans and technology. Capital in%estment up to a ma#imum of .s. 100 crore is reCuired. &he prolem areas are three+fold. &he company cannot forgo the capital in%estment as that could lead to reduction in its mar!et share as technological competence in this industry is a must and customers would shift to manufactures pro%iding latest in car technology. &he company does not want to issue new eCuity shares and its retained earning are not enough for such a large in%estment. &hus( the only option is raising det. &he company wants to limit its additional det to a le%el that it can ser%ice without ta!ing undue ris!s. ,ith the looming recession and uncertain mar!et conditions( the company percei%es that additional fi#ed oligations could ecome a cause of financial distress( and thus( wants to determine its additional det capacity to meet the in%estment reCuirements. @r. /hortsighted( the company)s 0inance @anager( is gi%en the tas! of determining the additional det that the firm can raise. De thin!s that the firm can raise .s. 100 crore worth det and ser%ice it e%en in years of recession. &he company can raise det at 15 per cent from a financial institution. ,hile wor!ing out the det capacity. @r. /hortsighted ta!es the following assumptions for the recession years. a) - ma#imum of 10 percent reduction in sales %olume will ta!e place. ) - ma#imum of 2 percent reduction in sales price of cars will ta!e place. @r. /horsighted prepares a pro'ected income statement which is representati%e of the recession years. ,hile doing so( he determines what he thin!s are the Eirreducile minimumF e#penditures under recessionary conditions. 0or him( ris! of insol%ency is the main concern while designing the capital structure. &o support his %iew( he presents the income statement as shown in "#hiit 1. "#hiit 1 pro'ected ;rofit and Loss account SUBJECT: Financial Management Marks:100 (-mount in .s. Crore) /ales re%enue (:$(000 units # .s. $(15(000) 1(2<$.0 =perating e#penditure >ariale cost 3 .aw material and manufacturing e#penses 1(1:0.0 >ariale o%erheads <0.0 &otal 1($20.0 0i#ed cost 3 . ? 4 +++ @ar!eting and ad%ertising 15.0 4epreciation 18:.5 ;ersonnel :0.0 &otal $:$.5 &otal operating e#penditure 1(51$.5 "AI& 15<.5 0inancial e#penses 3 Interest on e#isting 4eentures :.0 Interest on e#isting institutional orrowings 10.0 Interest on commercial loan 10.0 Interest on additional det 15.0 2$.0 "A& <:.5 &a# (5 157) 16.1 "-& 21.6 4i%idends ++ 4et redemption (sin!ing fund oligation) 50.0B Contriution to reser%es and surplus 11.6 B .s. 60 crore (e#isting det) G .s. 10 crore (additional det) -ssumptions of @r. /horsighted . ? 4 e#penditure can e done away with till the economy pic!s up. @ar!eting and ad%ertising e#penditure can e reduced y 60 per cent. Heeping in mind the in%estor confidence that the company en'oys( he feels that the company can forgo paying di%idends in the recession period. De goes with his wor!ed out statement to the 4irector 0inance( @r. -rthashatra( and ad%ocates raising .s. 100 crore of det to finance the intended capital in%estment. @r. -rthashatra does not feel comfortale with the statements and calls for the company)s financial analyst( @r. Longsighted. @r. Longsighted carefully analyses @r. /hortsighted)s assumptions and points out that insol%ency should not e the sole criterion while determining the det capacity of the firm. De points out the following 3 -part from det ser%icing( there are certain e#penditures li!e those on . ? 4 and mar!eting that need to e continued to ensure the long+term health of the firm. Certain management policies li!e those relating to di%idend payout( send out important signals to the in%estors. &he Zip Zap Zoom)s management has een paying regular di%idends and discontinuing SUBJECT: Financial Management Marks:100 this practice (e%en though 'ust for the recession phase) could raise serious douts in the in%estor)s mind aout the health of the firm. &he firm should pay at least 10 per cent di%idend in the recession years. @r. /hortsighted has used the accounting profits to determine the amount a%ailale each year for ser%icing the det oligations. &his does not gi%e the true picture. 9et cash inflows should e used to determine the amount a%ailale for ser%icing the det. 9et Cash inflows are determined y an interplay of many %ariales and such a simplistic %iew should not e ta!en while determining the cash flows in recession. It is not possile to accurately predict the fall in any of the factors such as sales %olume( sales price( mar!eting e#penditure and so on. ;roaility distriution of %ariation of each of the factors that affect net cash inflow should e analy*ed. 0rom this analysis( the proaility distriution of %ariation in net cash inflow should e analysed (the net cash inflows follow a normal proaility distriution). &his will gi%e a true picture of how the company)s cash flows will eha%e in recession conditions. &he management recogni*es that the alternati%e suggested y @r. Longsighted rests on data( which are comple# and reCuire e#penditure of time and effort to otain and interpret. Considering the importance of capital structure design( the 0inance 4irector as!s @r. Longsighted to carry out his analysis. Information on the eha%iour of cash flows during the recession periods is ta!en into account. &he methodology underta!en is as follows 3 (a) Important factors that affect cash flows (especially contraction of cash flows)( li!e sales %olume( sales price( raw materials e#penditure( and so on( are identified and the analysis is carried out in terms of cash receipts and cash e#penditures. () "ach factor)s eha%iour (%ariation eha%iour) in ad%erse conditions in the past is studied and future e#pectations are comined with past data( to descrie limits (ma#imum fa%ourale)( most proale and ma#imum ad%erse) for all the factors. (c) =nce this information is generated for all the factors affecting the cash flows( @r. Longsighted comes up with a range of estimates of the cash flow in future recession periods ased on all possile cominations of the se%eral factors. De also estimates the proaility of occurrence of each estimate of cash flow. -ssuming a normal distriution of the e#pected eha%iour( the mean e#pected SUBJECT: Financial Management Marks:100 %alue of net cash inflow in ad%erse conditions came out to e .s. $$0.$: crore with standard de%iation of .s. 110 crore. Heeping in mind the looming recession and the uncertainty of the recession eha%iour( @r. -rthashastra feels that the firm should factor a ris! of cash inadeCuacy of around 5 per cent e%en in the most ad%erse industry conditions. &hus( the firm should ta!e up only that amount of additional det that it can ser%ice <5 per cent of the times( while maintaining cash adeCuacy. &o maintain an annual di%idend of 10 per cent( an additional .s. 15 crore has to e !ept aside. Dence( the e#pected a%ailale net cash inflow is .s. 185.$: crore (i.e. .s. $$0.$: I .s. 15 crore) #"estion: -nalyse the det capacity of the company. C!$E % 2 &'E!(E$ )M)*E+ SUBJECT: Financial Management Marks:100 /tarted as trading firm in 1<$$( 8rea%es Limited has di%ersified into manufacturing and mar!eting of high technology engineering products and systems. &he company)s mission is Emanufacture and mar!et a wide range of high Cuality products( ser%ices and systems of world class technology to the total satisfaction of customers in domestic and o%erseas mar!et.F =%er the years 8rea%es has rought to India state of the art technologies in %arious engineering fields y setting up manufacturing units and susidiary and associate companies. &he sales of 8rea%es Limited has increased from .s $16 crore in 1<<0 to .s 801 crore in 1<<:. &he sales of 8rea%es Limited has increased from .s $16 crore in 1<<0 to .s 801 crore in 1<<:. ;rofits efore interest and ta# (;AI&) of the company increased from .s 15 crore to .s 81 crore in 1<<:. &he mar!et price of the company)s share has shown ups and downs during 1<<0 to 1<<:. Dow has the company performedJ &he following Cuestion need answer to fully understand the performance of the company3 "#hiit 1 8."->"/ L&4. ;rofit and Loss -ccount ending on 11 @arch (.upees in crore) 1<<0 1<<1 1<<$ 1<<1 1<<6 1<<5 1<<2 1<<: /ales .aw @aterial and /tores ,ages and /alaries ;ower and fuel =ther @fg. "#penses =ther "#penses 4epreciation @ar!eting and 4istriution Change in stoc! $16.18 1:0.2: 11.56 0.5$ 0.21 11.85 1.85 6.82 1.18 $51.10 $0$.86 15.20 0.:0 0.6< 15.68 1.:$ 5.2: 1.10 $8:.81 $10.81 18.01 1.11 0.88 12.15 1.5$ 5.16 6.<1 111.16 $11.:< 1:.06 1.80 $.1: $5.56 6.2$ 5.1: 0.68 156.$5 $65.21 1:.<2 6.61 $.12 11.20 5.<< <.2: + 1.11 5$1.52 1:<.81 68.$6 2.22 1.5: 61.60 8.51 10.81 5.21 :$8.15 561.52 20.68 :.:0 6.86 65.:6 <.10 1$.66 11.82 801.11 526.15 2<.22 <.$1 5.6< 68.26 11.51 12.<8 + 5.8: &otal =p "#penses $0$.:$ $1<.60 $28.<1 $<1.85 118.:: 6<1.61 2:$.$0 :11.:5 =perating ;rofit =ther Income 9on+recurring Income 11.21 $.16 1.10 11.:0 1.2< $.$8 18.<0 6.<: 0.10 1<.$< 6.$6 10.<8 15.68 :.:$ 12.66 $8.15 16.15 0.62 55.<5 11.15 0.5$ 2<.12 11.08 1.:5 ;AI& 15.10 1<.2: $1.<: 16.51 1<.26 6$.<8 25.2: 8$.26 Interest 5.52 2.:: 11.<$ 1<.2$ 1:.1: $1.68 $8.$5 $:.56 ;A& <.56 1$.<0 1$.05 16.8< $$.6: $1.50 1:.6$ 55.10 &a# ;-& 4i%idend .etained "arnings 1.00 2.56 1.80 6.:6 1.20 <.10 $.00 :.10 6.<0 :.15 $.10 6.85 0.00 16.8< 6.02 10.81 6.00 18.6: :.$< 11.18 :.00 16.50 8.58 5.<$ 8.20 $8.8$ 1$.85 15.<: 15.80 1<.10 16.18 $5.1$ SUBJECT: Financial Management Marks:100 "#hiit $ 8."->"/ L&4. Aalance /heet (.upees in crore) 1<<0 1<<1 1<<$ 1<<1 1<<6 1<<5 1<<2 1<<: -//"&/ Land and Auilding ;lant and @achinery =ther 0i#ed -ssets Capital ,I; 8ross 0i#ed -ssets Less3 -ccu. 4epreciation 9et &angile 0i#ed -ssets Intangile 0i#ed -ssets
22.2: 1$2.11 68.16 $:6.86 1.<1 5:.:5 :8.16 <0.00 6$.2: 162.15 $.22 60.21 :1.2: 100.01 28.16 112.8: :.12 26.<8 6:.5 <0.00 65.00 $10.0$ 5.01 65.15 68.$5 85.00 61.:5 $11.16 <.01 50.:1 SUBJECT: Financial Management Marks:100 $ 6$.56 #"estions 1. Dow profitale are its operationsJ ,hat are the trends in itJ Dow has growth affected the profitaility of the companyJ $. ,hat factors ha%e contriuted to the operating performance of 8rea%es LimitedJ ,hat is the role of profitaility margin( asset utilisation( and non+operating incomeJ 1. Dow has 8rea%es performed in terms of return on eCuityJ ,hat is the contriution of return on in%estment( the way of the usiness has een financed o%er the periodJ SUBJECT: Financial Management Marks:100 C!$E % 3 C,--$).& BE*/EE. P'-0EC*$ ). !BC C-MP!.1 -AC Company( has three pro'ects to choose from. &he 0inance @anager( the operations manager are discussing and they are not ale to come to a proper decision. &hen they are meeting a consultant to get proper ad%ice. -s a consultant( what ad%ice you will gi%eJ &he cash flows are as follows. -ll amounts are in la!hs of .upees. ;ro'ect 13 4uration 5 Kears Aeginning cash outflow L .s. 100 Cash inflows (at the end of the year) Kr. 1 I .s 10M Kr. $ I .s 10M Kr. 1 I .s 10M Kr.6 I 10M Kr.5 I 10 ;ro'ect $3 4uration 5 Kears Aeginning Cash outflow .s. 1:21 Cash inflows (at the end of the year) Kr. 1 I $00M Kr. $ I 200M Kr. 1 I 1000M Kr. 6 I 1000M Kr. 5 I $000. ;ro'ect 13 4uration 15 Kears Aeginning Cash =utflow I .s. 100 Cash Inflows (at the end of the year) SUBJECT: Financial Management Marks:100 Krs. 1 to 10 I .s. $0 (for 10 continuous years) Krs. 11 to 15 I .s. 10 (0or the ne#t 5 years) #"estion: If the cost of capital is 87( which of the 1 pro'ects should the -AC Company acceptJ C!$E % 2 $*!' E.&).EE').& C-MP!.1 /tar "ngineering Company (/"C) produces electrical accessories li!e meters( transformers( switchgears( and automoile accessories li!e ta#imeters and speedometers. /"C uys the electrical components( ut manufactures all mechanical parts within its factory which is di%ided into four production departments @achining( 0arication( -ssemly( and ;aintingNand three ser%ice departmentsN/tores( @aintenance( and ,or!s =ffice. &hough the company prepared annual udgets and monthly financial statements( it had no formal cost accounting system. ;rices were fi#ed on the asis of what the mar!et can ear. In%entory of finished stoc!s was %alued at <0 per cent of the mar!et price assuming a profit margin of 10 per cent. In @arch( the company recei%ed a trial order from a go%ernment department for a sample transformer on a cost+plus+fi#ed+fee asis. &hey too! up the 'o (numered y the company as Oo 9o 8:<) in early -pril and completed all manufacturing operations efore the end of the month. /ince Oo 9o 8:< was %ery different from the type of transformers they had manufactured in the past( the company did not ha%e a comparale mar!et price for the product. &he purchasing officer of the go%ernment department as!ed /"C to sumit a detailed cost sheet for the 'o gi%ing as much details as possile regarding material( laour and o%erhead costs. /"C( as part of its routine financial accounting system( had collected the actual e#penses for the month of -pril( y 5th of @ay. /ome of the rele%ant data are gi%en in "#hiit -. &he company tried to assign directly( as many e#penses as possile to the production departments. Dowe%er( It was not possile in all cases. In many cases( an o%erhead cost( which was common to all departments had to e allocated to the %arious departments using some rational asis. /ome of the possile ases were collected y /"C)s accountant. &hese are presented in "#hiit A. SUBJECT: Financial Management Marks:100 De also designed a format to allocate the o%erhead to all the production and ser%ice departments. It was reali*ed that the e#penses of the ser%ice departments on some rational asis. &he accountant thought of distriuting the ser%ice departments) costs on the following asis3 a. ,or!s office costs on the asis of direct laour hours. . @aintenance costs on the asis of oo! %alue of plant and machinery. c. /tores department costs on the asis of direct and indirect materials used. &he accountant who had to %isit the company)s an!er( passed on the papers to you for the reCuired analysis and cost computations. 'E#3)'E+ Aased on the data gi%en in "#hiits - and A( you are reCuired to3 1. Complete the attached Eo%erhead cost distriution sheetF ("#hiit C). .ote: ,here%er possile( identify the o%erhead costs chared directly to the production and ser%ice departments. If such direct identification is not possile( distriute the costs on some Erational asis. $. Calculate the o%erhead cost (per direct laour hour) for each of the four producing departments. &his should include share of the ser%ice departments) costs. 1. 4o you agree with3 a. &he procedure adopted y the company for the distriution of o%erhead costsJ . &he choice of the ase for o%erhead asorption( i.e. laour+hour rateJ "#hiit - /&-. "98I9"".I98 C=@;-9K -ctual "#penses(@anufacturing =%erheads) for -pril ./ ./ Indirect Laour and /uper%isions3 @achining 0arication -ssemly ;ainting /tores @aintenance Indirect @aterials and /upplies @achining 0arication -ssemly ;ainting @aintenance =thers 0actory .ent 11(000 $$(000 11(000 :(000 66(000 1$(:00 $($00 1(100 1(100 1(600 $(800 1(28(000 1(6<(:00 1$(800 SUBJECT: Financial Management Marks:100 4epreciation of ;lant and @achinery Auilding .ates and &a#es ,elfare "#penses (-t $ per cent of direct laour wages and Indirect laour and super%ision) ;ower (@aintenanceN.s 122M ,or!s =ffice .s $($00( Aalance to ;roducing 4epartments) ,or!s =ffice /alaries and "#penses @iscellaneous /tores 4epartment "#penses 66(000 $(600 1<(600 28(582 1(10($20 1(1<0 6(11(<10 5(<2(<10 &he Indian Institute of Ausiness @anagement ? /tudies /PAO"C&3 0inancial @anagement @ar!s3100 "#hiit A /&-. "98I9"".I98 C=@;-9K ;ro'ected =peration 4ata for the Kear 4epartment -rea (sC.m) =riginal Aoo! of ;lant ? @achinery .s 4irect @aterials Audget .s Dorse ;ower .ating 4irect Laour Dours 4irect Laour Audget .s @achining 0arication -ssemly ;ainting /tores @aintenance ,or!s =ffice &otal 11(000 11(000 8(800 2(600 6(600 $($00 $($00 68(000 $2(60(000 11($0(000 2(20(000 $(26(000 1(1$(000 1(<8(000 28(000 5$(80(000 2$(60(000 $1(20(000 10(80(000 <6(80(000 $0(000 10(000 1(000 $(000 11(000 16(60(000 5($8(000 :($0(000 1(10(000 10(18(000 5$(80(000 $5(60(000 11($0(000 2(20(000 <<(00(000 9ote &he estimates gi%en in this e#hiit are for the udgeted year Oanuary to 4ecemer where as the actuals in "#hiit - are 'ust one monthN-pril of the udgeted year. &he Indian Institute of Ausiness @anagement ? /tudies /PAO"C&3 0inancial @anagement @ar!s3100 "#hiit C /&-. "98I9"".I98 C=@;-9K -ctual =%erhead 4istriution /heet for -pril 4epartments =%erhead Costs ;roduction 4epartments /er%ice 4epartments &otal -mount -ctuals for -pril (.s) Aasis for 4istriution -. -llocation of =%erhead to all departments -.1 Indirect Laour and /uper%ision 1(6<(:00 -.$ Indirect materials and supplies
1$(800 -.1 0actory .ent 1(28(000 -.6 4epreciation of ;lant and @achinery 66(000 -.5 Auilding .ates and &a#es $(600 -.2 ,elfare "#penses 1<(6<6 -.: ;ower 28(582 -.8 ,or!s =ffice /alaries and "#penses 1(10($20 -.< @iscellaneous /tores "#penses
1(1<0 -. &otal (-.1 to -.<) 5(<2(610 A. .eallocation of /er%ice 4epartments Costs to ;roduction 4epartments A.1 4istriution of ,or!s =ffice Costs A.$ 4istriution of &he Indian Institute of Ausiness @anagement ? /tudies /PAO"C&3 0inancial @anagement @ar!s3100 @aintenance 4epartment)s Costs A.1 4istriution of /tores 4epartment)s Costs &otal Charged to ;roducing C. 4epartments (-GA) 5(<2(610 4. Laour Dours -ctuals for -pril 1($0(000 66(000 20(000 $:(50 0 ". =%erhead .ateQ;er Dour (4) &he Indian Institute of Ausiness @anagement ? /tudies /u'ect3 0inancial @anagement @ar!s3 100 Case 4: E!$*E'. M!C,).E$ C-MP!.1 .a'( who was in charge production felt that there are many prolems to e attended to. Aut Ruality Control was the main prolem( he thought( as he found there were more complaints and litigations as compared to last year. ,ith the demand increasing( he does not want to ta!e any chances. /o he went down to assemly line( ut was greeted y an unfamiliar face. De introduced himself. Raj3 I am in charge of chec!ing the components( which we use( when we assemle the machines for customers. 0or most of the components( suppliers are %ery reliale and we assume that there will not e any prolem. ,hen we generally test the end product( we don)t ha%e failures. Namdeo3 I am 9amdeo. I was in another dept. and has een transferred recently to this dept. Raj3 .ecently we ha%e een ha%ing prolems( and there has een some complaint or other aout the machines we ha%e supplied. I am worried and would li!e to chec! the components used. I would li!e to a%oid lot of e#pensi%e rewor!. Namdeo3 Aut it would e %ery e#pensi%e to test e%ery one of them. It will ta!e at least half an hour for each machine. I neither ha%e the staff nor the time. It will e rather pointless as ma'ority of them will pass the test. Raj3 &here has een more demand than supply for these machines in last $ years. ,e ha%e een uying many components from many suppliers. ,e ha%e een producing more with e#tra shifts. ,e are trying to capture the mar!et and increase our mar!et share. Namdeo3 ,e order for components from different places( and sometimes we do not ha%e time to chec! all. &here is a time lag etween order and supply of components( and we cannot wait as production will stop. ,e use whate%er comes soon as we want to complete our orders. Raj3 =hS =%iously we need some !ind of chec!ing. /ome sampling techniCue to chec! the Cuality of the components. ,e need to get a sample from each shipment from our component suppliers. Aut I do not !now how many we should test. Namdeo3 ,e should as! someody from our statistics dept. to attend to this prolem. -s a /tatistician( ad%ice what !ind of /ampling schemes can we consider( and what factors will influence choice of scheme. ,hat are the Cuestions we should as! @r. 9amdeo( who wor!s in the assemly lineJ