UFV CHANDIGARH BUS 247 Managerial Accounting

Feasibility of Fruit Fresh Juice Ltd.

Group No. 6 Singh, Amandeep (200106660) Singh, Vikram (200106835) vikram.singh2@ymail.com +917508762333 amandeep.sgha28@gmail.com +919878667513

Submitted to: Prof. Mushtaq Ahmed Date Submitted: April 2, 2013 Date Due: April 2, 2013

TABLE OF CONTENTS
S No. 1. Introduction Background Objective 2. 3. 4. 5. 6. 7. 8. Summary of Findings Firm, Industry and Environment Competitive Environment Strategy for the Success in Market Business Risk and Control Activities to Reduce this Risk Strategic Selling Price Identification of Material Cost, Labor Cost, and Indirect Manufacturing Cost Direct Materials Cost Direct Manufacturing Labor Cost Indirect Manufacturing Cost 9. Assignment of Cost Using Process Job Costing Method Selling Price Assignment of cost 10. Cost-Volume Profit Analysis Contribution Income Statement Breakeven Quantity 11. 12. 13. 14. Budgeted Income Statement Outlook Summary and Conclusion Appendix Bibliography 21 22 23 23 25 26 27 28 29 11 13 14 Particulars Page No. 3 3 3 5 6 7 8 9 10 11

INTRODUCTION
BACKGROUND The Chandigarh tourism is going to organize Rose Festival from 25th May to 27th May 2013 at Rose Garden & Leisure Valley, Chandigarh. The Chandigarh Tourism is inviting tenders to set up a fruit juice stall, in order to, provide fresh juice to the visitors. The organizers are expecting more than 20,000 visitors every day. The organizers will provide a temporary booth at a daily rental of Rs. 8,000. Any other infrastructural needs have to be fulfilled by the fruit juice seller himself. You cannot provide more than two types of juices. Apart from these there will be one stall each for beverage drink (Coke, Pepsi etc.), Tetra pack juice (frooti etc.) and Nariyal Paani. OBJECTIVE Fruit Fresh Juice Ltd selling Fruit Fresh juices in Chandigarh is quite optimistic about this venture. The Marketing people have given thumbs up for this proposal as according to its market survey reports at least 50% of the total visitors will prefer to have fresh juices. The Company has decided to make and sell Mausami juice and Neembu Paani. The marketing people are also suggesting that with effective advertisement, sales can be increased by further 25%. The objectives of this cost accounting project report are: 1. Collect relevant information regarding each juice provided by the group to the consumers. 2. Determine the cost of the juices provided by us. 3. Understand the business, and estimate the competition, and competitors.

4. To gather information from the market, this will help us to calculate the actual cost of selling juices. 5. To analyse and determine the material cost, labour cost, and Indirect manufacturing cost. 6. Assignment of cost using either Job costing method or ABC method. 7. Use CVP technique to calculate break even quantity, sales and target profit. 8. Preparation of Budgeted Income statement. 9. Calculate Profitability.

SUMMARY OF FINDINGS
We are serving public with one juice Mausami, and Lemonade. In talk with few people of Sec 32 C Chandigarh, we found out the likings of people as to what would they prefer in that season. We interviewed 30 people, and found out that 19 out of 30 people would prefer lemonade over Mausami juice in that season, as it is more refreshing and light drink. Also in talks with few of the juice vendors we found out that people will prefer lemonade over Mausami juice. We decided to advertise and found out that it would cost as follows: Five 8 sq. feet banners (Rs. 200 per banner) = Rs. 1,000 4000 Flyers and Pamphlets (Rs. 1.0 per unit) = Rs. 4,000 60 word Newspaper Ad (Rs. 70 per word) = Rs. 4,200 This would increase our sales by 25%. Hence, leading to the increase in number of customers from 10,000 to 12,500 per day, from above we can see that 64% would prefer lemonade that accounts for roughly around 8,000 people, and remaining 4,500 people preferring Mausami juice.

FIRM, INDUSTRY, AND ENVIRONMENT

Description Fruit Fresh Juice Ltd is very well recognized company with its new venture coming up in Rose festival organized by Chandigarh Tourism. The marketing people for Fruit Fresh Juice are very optimistic about this venture, as this is one of the most profitable businesses. The enterprise will start its new venture in Rose Garden & leisure valley, Sec- 10. The enterprise has been in the market for last 30 years, and is perfect at its preparation. The enterprise has its operation in 5 major sectors of Chandigarh, Sec- 5, Sec- 33, Sec 38, Sec 20, and Sec- 51. The enterprise is serving customers with lemonade and Mausami juice. Fruit Fresh has a unique and different preparation for fruit juices. The market is wide as there are 10,000 people who will be visiting the juice stalls. The festival will be organized from May 25th to May 27th.

COMPETITIVE ENVIRONMENT
The environment for competition is very narrow, since there is a monopoly of juice stall. But the other vendors selling beverages like cold drinks, fruity, and Nariyal paani will give a tough competition. Few of the competitors in this line are: 1. Bawa Fruit Juice corner, sector 20, Chandigarh. 2. Mela Juice Corner, Sector 32, Chandigarh. 3. Gulati Juice Corner, Sector 9, Chandigarh. These are the competitors that will come up as a major competitor. They will be the one who will hinder our sales, and will take away our customers. There will be a tough competition in field of price, the major competition, since there will be many players. Though we have a tough competition, the market survey reports at least 50% of the total visitors will prefer to have fresh juices, this is the major plus point for the enterprise. This shows the preference of fruit juices in comparison to other cold-drinks and beverages.

STRATEGY FOR THE SUCCESS IN THE MARKET

Our strategy for success in the market would be marketing. The enterprise wishes to advertise, which will lead to an increase of 25% in customers. This means that the enterprise will be able to make more sales hence greater cost will be covered leading to less losses or greater profits. The enterprise plans to hang 4 banners around the garden displaying prices, how to get there, and most importantly the name of the enterprise. We also plan to hang 1 banner at the stall for advertising. We will print and distribute 4,000 Flyers, and publish an Ad in Newspaper. This will help reach every common person, and hence increase the awareness amongst people about the existence of the juice corner/stall.

BUSINESS RISK AND CONTROL ACTIVITIES TO REDUCE THIS RISK

The major threats the company may face are:

1. One major threat the enterprise will face is the price factor. The competitors will try their
best to take-over the market share of Fruit Fresh.

2. The other factor would be the change in prices of various materials that is being used in
the preparation.

3. The material to be taken on rent, the renting party may change the rent prices. 4. There may be new a competitor that may arise and try to hamper the selling of the
commodity.

5. There may be a change in the government rule and regulation, upon cleanliness and
hygiene.

6. There may be a change in the labor acts, or change in minimum wage law. 7. The availability of the fruits at that time can play a major role.
Control Activities to Reduce Risk

1. To keep track of prices, time to time. 2. To keep tracks of the competitors and enterprises that is coming up slowly. 3. Keep in touch with the regulations of the government.

10 STRATEGIC SELLING PRICE

As per our findings with our Non-paying sponsor, Bawa Juice corner, Sec - 20 C, Chandigarh, we found out that on an average lemonade took 1.5 lemons per glass , and 3 Mausamis per glass of 250 ml. We have decided to set the selling price with a margin of Rs. 10 per glass on both Mausami Juice and Lemonade. So, the prices are set as follows:

Juice Mausami Juice Lemon Water

Per Unit Cost 15.066 5.596 25 15

Selling Price

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IDENTIFICATION OF MATERIAL COST, LABOUR COST, AND INDIRECT MANUFACTURING COST

Step 1 Identify the Job that is the chosen cost object The cost object for Fruit Fresh Juice Ltd is the manufacturing of fruit juice. Step 2 Identify the direct cost Fruit Fresh Juice Ltd has identified two direct manufacturing costs: Direct materials. Direct manufacturing labor. DIRECT MATERIAL COST As per the organizers, they are expecting 20,000 visitors per day (for 3 days) at Rose Garden, Leisure Valley and, according to the marketing people, at Fruit Fresh Juice Ltd. at least 50 % of the total visitors will prefer to have fresh juices (10,000 customers per day). We are expecting 12,500 out of those 20,000 visitors to prefer Fruit Fresh Juices because of effective advertising. We have decided to sell Mausami Juice and Lemon Water in the ratio of 4.5:8, respectively, as more people will prefer Lemon Water for refreshment. So, everyday 4,500 visitors will drink Mausami Juice and 8,000 will drink Lemon Water. Quantity of fruit used for each juice in 3 days is (35 x 5000/ 70) = 2500 kg.

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Direct material cost (3 days)

Fruit Mausami Quantity (per unit)* 6,800 kg Price per unit (Rs) 25 per kg Total (Rs) 1,70,000

1 Glass (250 ml) of Mausami Juice = 3 Mausami 1 kg Mausami = 6 Mausami (avg.) Therefore, 1 kg of Mausami = 2 Glasses of Mausami Juice 13,500 Glasses of Mausami Juice = 13,500/2 Kg = 6,750 kg = 6,800 kg approx. Lemon 1,400 kg 50 per kg 70,000

1 Glass (250 ml) of Lemon Water = 1.5 Lemon 1 kg Lemon = 25 Lemons (avg.) Therefore, 1 Kg of Lemons = 17 Glasses of Lemon Water approx. 24,000 Glasses of Lemon Water = 24,000/17 Kg = 1,411 kg = 1,400 kg approx. Glass Total 37,500 units 1.2 45,000 2,85,000

Total Direct Material Costs = Total fruit cost + Cost of Glasses = Rs. 2,85,000

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DIRECT MANUFACTURING LABOR COST We have decided that for one day a worker would be hired at Rs 40 per hour. The rose festival is held between 10 am to 8 pm approximately. Therefore, a worker would be employed for 10 hours per day. For the three days, we would require 3 workers to cater to 10,000 customers per day. Direct Labour Cost per day = (No. of workers = (3 10) 40 = Rs. 1,200 per day Total work hours) wage rate per hour.

Total Direct Labour Cost = Direct Labour Cost per day x No. of Days = 1,200 x 3 = Rs 3,600 Step 3 Select the cost allocation bases to use for allocating indirect costs to the job Fruit Fresh Juice Ltd has selected the units of production as the bases for allocating indirect cost to the job.

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Step 4 Identify the indirect costs

Total indirect cost (3 days)

Particulars Rent (1 Day) Juicer Machine Rent Lemon Squeezer Salt Mixture Total No. of Glasses = 37,500 1 Packet of Salt = 600 Glasses Total No. of Packet Required = 37,500/600 = 62 Packets approx. Sugar 1 Glass = 15 ml of Sugar Syrup 24,000 Glasses of Lemon Water = 24,000 x 15 ml = 3,60,000 ml of Sugar Syrup = 360 lt. 1 lt. water + 500 gm. sugar = 1.3 lt. of Sugar Syrup kg Sugar = 1.3 lt. of Sugar Syrup ( / 1.3) kg Sugar = 1 lt. of Sugar Syrup 24,000 Glasses = ( x 360) /1.3 = 138.5 kg = 140 approx. Sugar Ice (8 Slabs per day) Utensils Water Tanker (2 per day) 24 Slabs 6 tankers 120 per slab 500 per tanker 2,880 1,780 3,000 140 kg 33 per kg 4,620 1 2 60 Quantity (units) Per unit cost (Rs) 8,000 500 per day 50 75 (in Rs) 24,000 1,500 100 4,500

1 Glass of Lemon Water = 200 ml of Water

8,000 Glasses of Lemon Water per day = 8000 x 200 ml = 16,00,000 ml of Water = 1,600 lt. of Water 1 Tanker = 1,000 lt. Water Therefore, Fruit Fresh Juice Ltd requires 2 tankers per day Tissue Paper 800 Packs 5 per pack 4,000

1 Pack of Tissue Paper = 50 Tissue Paper 37, 500 customers = 40,000 Tissues approx. 40,000 Tissues = 40,000/50 = 800 Packs 1 Pack = Rs. 5 800 Packs = 800 x 5 = Rs. 4,000 Hand Towels Hand Gloves Electricity Soap Scrubber Bulbs Fan Rent Total 10 per Piece 800 Pairs 3 1 2 1 10 3 per pair 10 15 10 300 100 2400 341 30 15 20 300 49,586

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Mausami Juice indirect cost (3 days)

Particulars Rent (1 Day) Juicer Machine Rent Salt Mixture Total No. of Glasses = 13,500 1 Packet of Salt = 600 Glasses Total No. of Packet Required = 13,500/600 = 20 Packets approx. Ice (3 Slabs per day) Utensils Tissue Paper 9 Slabs 288 Packs 120 per slab 5 per pack 1,080 640 1,440 1 20 Quantity (units) Per unit cost (Rs) 2,880 500 per day 75 (in Rs) 8,640 1,500 1,500

1 Pack of Tissue Paper = 50 Tissue Paper 13, 500 customers = 14,400 Tissues approx. 13,500 Tissues = 14,400/50 = 288 Packs 1 Pack = Rs. 5 288 Packs = 288 x 5 = Rs. 1,440 Hand Towels Hand Gloves Electricity Soap Scrubber 4 per Piece 288 Pairs 1 10 3 per pair 10 40 864 210 10 5

Bulbs Fan Rent Total

7 108 16,044

Lemon Juice indirect cost (3 days)

Particulars Rent (1 Day) Lemon Squeezer Salt Mixture Total No. of Glasses = 24,000 1 Packet of Salt = 600 Glasses Total No. of Packet Required = 24,000/600 = 40 Packets Sugar 1 Glass = 15 ml of Sugar Syrup 24,000 Glasses of Lemon Water = 24,000 x 15 ml = 3,60,000 ml of Sugar Syrup = 360 lt. 1 lt. water + 500 gm. sugar = 1.3 lt. of Sugar Syrup kg Sugar = 1.3 lt. of Sugar Syrup ( / 1.3) kg Sugar = 1 lt. of Sugar Syrup 24,000 Glasses = ( x 360) /1.3 = 138.5 kg = 140 approx. Sugar Ice (5 Slabs per day) Utensils 15 Slabs 120 per slab 1,800 1,140 140 kg 33 per kg 4,620 2 40 Quantity (units) Per unit cost (Rs) 5,120 50 75 (in Rs) 15,360 100 3,000

Water Tanker (2 per day)

6 tankers

500 per tanker

3,000

1 Glass of Lemon Water = 200 ml of Water 8,000 Glasses of Lemon Water per day = 8000 x 200 ml = 16,00,000 ml of Water = 1,600 lt. of Water 1 Tanker = 1,000 lt. Water Therefore, Fruit Fresh Juice Ltd requires 2 tankers per day Tissue Paper 512 Packs 5 per pack 2,560

1 Pack of Tissue Paper = 50 Tissue Paper 37, 500 customers = 25,600 Tissues approx. 40,000 Tissues = 25,600/50 = 512 Packs 1 Pack = Rs. 5 512 Packs = 512 x 5 = Rs. 2,560 Hand Towels Hand Gloves Electricity Soap Scrubber Bulbs Fan Rent Total 6 per Piece 512 Pairs 2 10 3 per pair 10 15 10 300 60 1,536 131 20 10 13 192 33,542

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Quantity (per Utensils unit)

Juice Container 6 lt. Container 3 lt. Jugs Knife Dustbin Small Size Large Size Sieve Serving Spoon Salt Container Plastic Barrels (80 lt. per barrel) Total 2 2 3 3 2 2 1 2 4

Price per unit (Rs)

Total Cost (Rs)

440 80 20

440 160 80

50 200 50 50 50 200

100 200 150 150 100 400

1,780

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Electricity Usage @ Rs 4.5 unit (3 Days)

Electrical Wattage Appliances 1 Juicer Machine 2 Bulbs 1 Fan Total 1000 W 50 W 1500 W Consumed 1 0.10 1.5 30 6 30 Hours Cost 135 3 203 341 Units Operating Total

Step 5 Compute the rate per unit of each cost allocation base Mausami: Actual manufacturing overhead rate = Actual manufacturing overhead costs Actual total quantity of cost allocation base = 16,044 / 13,500 = 1.18 per glass Lemon: Actual manufacturing overhead rate = Actual manufacturing overhead costs Actual total quantity of cost allocation base = 33,542 / 24,000 = 1.39 per glass

21 ASSIGNMENT OF COST USING PROCESS - JOB COSTING METHOD

Mausami Juice Costs

Total Cost (Rs) Fruits Glasses Direct Manufacturing Labour Indirect Manufacturing Cost Total Cost 2,03,540 15.066 16,044 1.18 1,70,000 16,200 1,296 Per Unit Cost (Rs) 12.59 1.2 0.096

Lemon Water
Total Cost (Rs) 70,000 28,800 2,304 Per Unit Cost (Rs) 2.91 1.2 0.096

33,542

1.39

1,34,646

5.596

Total Manufacturing Cost = Total Cost of Mausami Juice + Total Cost of Lemon Water = 2,02,676 + 1,33,110 = 338,186 SELLING PRICE Selling Price is taken at cost plus with approx. 10 Rs. margin. Juice Mausami Juice Lemon Water 25 15 Selling Price

ASSIGNMENT OF COST Our group decided to go for Job-order costing to obtain all the tables asked in the project for Fruit Fresh Juice Ltd. This was done due to the reasons, that activity-based costing requires substantial resources, and is more costly and time consuming as compared to job order costing. We used job order costing, since the products of the Juice Company are just two: Mausami Juice & Lemon Water and, job order costing is used in situations where there are different products. In the indirect cost pool, materials like sugar and water have been used, in case of, Lemon Water only so, the cost of those things will be allocated according to the units of production of Lemon Water i.e., 24000 glasses of 3 days. And also in the project we are asked to find out the direct material, labor cost and indirect manufacturing cost, i.e. the manufacturing overhead which can be allocated more easily using the Job-order Costing Method.

COST-VOLUME PROFIT ANALYSIS

REVENUE Juice Mausami Juice Lemon Water Total Revenue Selling Price (Rs) 25 15 Quantity 13,500 24,000 37,500 Revenue (Rs) 3,37,500 3,60,000 6,97,500

Pretax Operating Income = 6,97,500 3,38,186 = Rs. 3,59,314 CONTRIBUTION INCOME STATEMENT (BEFORE ADVERTISING) CONTRIBUTION INCOME STATEMENT Particulars Amount in Rs. (No. of Units Sold = 30,000) Revenue Variable cost Contribution Margin Fixed Cost Operating Income 5,70,000 2,39,000 3,31,000 49,856 2,81,144

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CONTRIBUTION INCOME STATEMENT (AFTER ADVERTISING) CONTRIBUTION INCOME STATEMENT Particulars Amount in Rs. (No. of Units Sold = 37,500) Revenue Variable cost Contribution Margin Fixed Cost Operating Income 6,97,500 2,85,000 4,12,500 62,386 3,50,114

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BREAK EVEN QUANTITY Breakeven Quantity of Mausami Juice = Fixed Cost

(Per unit Selling Price Per unit Variable Cost) Unit Selling Price = Rs. 25 Unit Variable Cost = (1,70,000 + 13,500 x 1.2) / No. of Units = (1,70,000 + 16,200)/ 13,500 = Rs. 13.79 Breakeven Quantity of Mausami Juice = 19,147 / (25 13.79) = 19,147 / 11.21 1,708 approx. Breakeven Quantity of Lemon Water = Fixed Cost

(Per unit Selling Price Per unit Variable Cost) Unit Selling Price = Rs. 15 Unit Variable Cost = (70,000 + 24,000 x 1.2) / No. of Units = (70,000 + 28,800)/ 24,000 = Rs. 4.12 Breakeven Quantity of Lemon Water = 34,039 / (15 4.12) = 34,039 / 10.88 3,129 approx. Total Break Even Quantity = 1,708 + 3,129 = 4,837 Glasses

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BUDGETED INCOME STATEMENT Fruit Fresh Juice Ltd.

Budgeted Income Statement For May 25, 2013 to May 27, 2013 Particulars Revenues Cost of Goods Sold Gross profit Other Operating Expense: Advertisement Expense Net Operating Income 9,200 9,200 3,50,114 Details Amount (Rs) 6,97,500 3,38,186 3,59,314

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OUTLOOK SUMMARY & CONCLUSION

OUTLOOK FOR PERFORMANCE, EARNINGS, AND PROJECTIONS The performance of the juice shop is expected to earn good profit because the costs are less than the revenues. We are providing with 2 types of juices which will be providing us with the entire revenue. Moreover, by advertising, the sales are increasing and there is more revenue leading to more profits for the shop. When the advertisement is done, we see that revenues and cost incurred are increased but at the same time, profits also increase by good amount. So, it is very necessary that advertisement is done leading to better revenues for the firm. CONCLUSIONS We have planned to sell 2 juices i.e. Mausami Juice at Rs. 25 and Lemon Water at Rs. 15. By spending Rs. 9,200 on advertisement, we are expecting a profit which is Rs. 3,50,114 by selling 25% more glasses per day i.e., 4,500 glasses for Mausami Juice and 8,000 glasses for Lemon Water.

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APPENDIX
Activities Quantity Estimated Cost

Printing Media
Banners (Rs. 25 per sq. feet with iron frame including labour charges) Flyers and Pamphlets (Good Quality Coloured Paper Rs. 1.0 per unit) Newspaper Ad (Rs. 70 per word including graphics) Total Rs. 9,200 60 approx. Rs. 4,200 4,000 Rs. 4,000 5 Banners (8 sq. feet) Rs. 1,000

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BIBLIOGRAPHY
TEXT Managerial Accounting AUTHORS Ray H. Garrison Eric W. Noreen INTERNET www.google.com www.kidsfruit.com REFERENCES 1. Chandokhe , Jyotbir S. & Singh, Amandeep, et al; Advertising Planning for UFV Chandigarh; Pg 15; April 4, 2012; Retrieved Mar 30, 2013