Nitish Kumar 1811107 Sec - B

Individual Assignment- Management Accounting

Company Name: DCW Ltd. (Petrochemicals Sector)

Based on financial data collected from capitaline.com for last 10 years, cost structure has
been developed in Table A and contribution margin, operating leverage factor, break-even
point and margin of safety have been calculated in Table B.

Insights from Analysis:

 Fixed cost of production is very small portion only 7.5% of total cost, which consist of
depreciation in plants & machinery. These are major fixed cost in a petrochemical
industry. Company has current investments of 1004 crores in these fixed assets and
is charging a small portion of it as depreciation each year (because of long life of these
plants & machinery) which helps in keeping total cost low and be competitive in market
in terms of price as export of products over industry has decreased by 14% in last one
year.
 Variable cost of production has been split in Raw material cost (52.19% of sales) &
other expenses (36.47% of sales). Because of negative intercept value in relation
between other expenses and sales, fixed portion of this head has been considered 0.
 Mostly these variable costs reflect in pricing of product of this industry (around 89% of
total sales).
 Closing inventory has increased from last year, therefore, some of the current year
production would be kept for meeting future demand.
 Contribution margin is 13.2% (good as per industry average) and operating leverage
factor of 2.21 is also very good as it suggests that around 45% of contribution goes to
PBIT. Maintaining this factor will help in future when demand would rise and
accordingly profit will increase.
 Sales of 2017 & 2018 are almost equal and last year the company was in profit
whereas this year, it is in net loss. This is not because of cost structure but higher
interest paid this year on debt. Total production costs are almost same in both years.
 Break-even-point occurs at 649.07 crores, which is 54.67% of total sales value. This
shows that company is doing good in its business despite falling trend of demand. It
also gives enough margin of safety to company to get a decent profit over total
revenue.
 The company has high debt to assets ratio (0.54) which leaks high interest payment
and is ultimately affecting net profit. Company is focusing on reducing debt as is
evident from balance sheet and has been quite successfully in its effort.

Recommendation: Cost structure of this company looks very impressive and is doing very
well considering shrink in oil market. Company can look in its employee salary expenses as it
has increased by 19.73% from previous year despite falling sales from last 6 years.

Conclusion: Last few years have been tough time for all companies in oil & gas sector which
affect petrochemical industries. This has caused reduction in demand. As soon as the market
rises (and is continuously improving), sales would bounce back, and net profit would rise.
Current high investment in fixed assets would then pay off and the company product prices
would be very much competitive to others.

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 Nitish Kumar 1811107 Sec - B

Following data has been collected from www.capitaline.com for DCW Ltd company.

Table 1. D C W LTD. (Rs. in Crores)

Year Net Sales Raw Material Other Expenses
2018 1,187.42 583.38 464.56
2017 1,175.79 603.07 439.74
2016 1,263.35 615.17 498.65
2015 1,254.47 644.38 502.61
2014 1,325.55 697.98 518.6
2013 1,327.80 607.04 513.25
2012 1,184.58 590.55 470.32
2011 1,058.31 703.79 250.9
2010 1,026.81 543.19 300.73
2009 907.04 578.86 258.03

Variable Cost 52.19% 36.47%

Fixed Cost (will be taken as 0 for calculation
-448.3972486
of variable cost in other expense)

Table A. COGM & COGS Schedule 2018 (Rs. In Crores)

Fixed Manufacturing Cost (depreciation of plant &
85.52
machinery)
Raw Material 619.7486
Other Expenses 433.1008
COGM 1138.369

Opening Inventory 135.18

Closing Inventory 157.06
COGS = COGM + Op. Inv. – Cl. Inv. 1,116.49

Table B. CM, OLF, BEP, MOS

Sales 1,187.42
COGS 1,116.49
Fixed Manufacturing Cost 85.52
VC = COGS - Fixed Cost 1,030.97
Contribution = Sales - VC 156.45
Contribution Margin = Contribution/Sales 0.132

PBIT 70.93
Operating Leverage Factor =
2.21
(Contribution/PBIT)

BEP (in sales value) = Fixed Cost/Contribution

649.07
Margin
Margin of Safety (in sales volume) 538.34

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