Gupchup Expansion Industries Ltd

About the CompanyEngaged in manufacturing and marketing activities.

Factories located in 12 cities with the sales turnover of Rs. 50 crores.Experiencing rapid expansion and with present growth rate, expected sales volume to exceed Rs. 7 croresManagement wants to implement profit center concept for better planning and controlling.

Q1. How do you distinguish profit center from service center? PROFIT CENTREProfit centers concentrate on difference

between input and output, which can be measured in financial terms.

Measurement of profit centre depends on measurement of efficiency and effectiveness.

It is that department whose manager responsible for cost as well as revenue of department measured in monetary terms.

A profit center manager is held accountable for both revenues, and costs (expenses), and therefore, profits.

SERVICE CENTREService centers supply services to the

business units and bill back the costs. Service centers provide and guidance to line

managersIn service centers, output cannot be

measured in financial terms.

Outline the basic consideration in determining a profit center?

The input and output are both measured in financial terms.

Managers should have access to relevant information for making decision.

It considers performance measuring criteria It is made at lowest possible management level. The cost of creating profit centre should not be higher

than the benefits derived in the long run.For profit centre, the quantitative information may be

enough for performance.

Q2. Outline the profit centers in the above company?Material division :Vendor Development programme Junk cell

Manufacturing division :Consultancy services

Marketing Division

Materials DivisionThis can be the profit center since it incurs cost in the form

of purchasing the materials required by various factories. On the other hand, its junk cell department is responsible

for purchasing junk steel consumer products, reconditioning them and then selling them to outside contractors.

INPUT OUTPUT

Purchase of Materials = Rs.2900 lacs

Sales = 5000 lacs

Purchases made from ancillary units = Rs 725 lacs

Marketing DivisionCan be converted to profit center by charging it with the

cost of product sold.Sales office also functions as godowns, so there can be

transfer pricing from marketing division to materials division

Transfer pricing provides marketing manager with relevant information to make optimum revenue-cost trade off.

Material

Division

Marketing

Division

Transfer PricingINPUT OUTPUT

2900 50003500

600 1500 2100

Manufacturing DivisionIn this department the managers are

responsible for cost spending like generating information on new products, new process, design and development, technical feasibility & economic feasibility studies etc, so it functions as a cost center.

To measure its activity this can be turn it into profit center.

It is good since factor influencing volume & mix of sales are beyond manufacturing manager control.

Profit Center can be measured as:

Revenue(-) Cost of Sales(-)Variable ExpensesContribution Margin(-)Fixed ExpensesDirect Profit(-)Controllable ChargesControllable Profit(-)Other Corporate AllocationsIncome before tax(-)TaxNet Income

Exhibit 1 Managing Director

GM (Materials)

RM procurement

Vender Developmen

t unit

Volume Engineering

Junk Cell

GM (Manufacturi

ng)

Industrial Engineering

Process know-how

R&D

GM (Finance)

Financial Accounting

Industrial Audit

Revenue & Taxation

Mgt Accounting & Reporting

GM (Administrat

ive)

Industrial Relation &

PR

Recruitment

Personnel Planning &

Development

GM (Marketing)

Export Executive

Advertising Mgr

MR Mgr

Exhibit 2Product line Sales (Rs

lakhs)Government

Institutions Wholesalers/Retailers, etc

Trading line 1000 - - 100%

Leather Products(Exports)

200 - - -

Defense Equipment 150 100% - -

Old Steel Products(Reshaping)

100 - - -

Packing (Internal use Only)

250 - - -

Typewriters 300 20% 70% 10%

Electronic Motor

350 - 40% 60%

Electronic Lamps 450 20% 30% 50%

Decorative Glass 250 - 80% 20%

Printing, Writing 250 10% 20% 70%

Canning 150 - 20% 80%

Contd..Cycle Seats 50 - 100% -

Sanitary ware 200 - 60% 40%

Biscuits 150 - 10% 90%

Fans 150 25% 25% 50%

Detergents 200 20% 40% 40%

Printing Press 200 - 100% -

Wire Products 250 - 80% 20%

Locks & Safes 100 10% 30% 60%

Pesticides 150 30% 40% 30%

Total 5000

Exhibit 2 (a)Cities ProductsLudhiana Reconditioning of old steel products on contract

basisKanpur Leather products for exports

Bhavnagar Canned foods & biscuits

Cuttak Packing materials

Vijaywada Biscuits

Aurangabad Defense equipment

Hubli Locks, Safes & wire products; cycle seats

Cochin Detergents & pesticides, inks, gums & paints

Madurai Electric lamps & bulbs

Gwalior Sanitary ware/ Porcelain & Decorative glass

Poona Electric motors fans

Calcutta Printing press & typewriters

Exhibit 3 – Summary of Income StatementNet Sales Revenue (net of packing) 4750

Consultancy & Services 50

4800

Costs :

Materials 2900

Labour 600

Manufacturing Overheads 500 4000

Gross Profit 800

Less : Selling & Distribution Expenses 300

Profit Before Tax 500

Thank You