Problem Statement:

Whether to accept the contract agreement from APL or not?

Options:
1. Accept the offer of the APL
2.

Reject the offer of the APL

Criteria for Evaluation:

1. Effect on the profit of KCPL after signing of deal with APL
2. The process improvement and the technical expertise APL will bring with it.
3. Family image and long-term goal of KCPL to become national player

Scenario:

1. Become CMU for A ONE CONFECTIONERY

2. Re-structuring the production process and introduction of mechanized process
3. Increase HR policy and increase supply to canteens of institutions

1.Become CMU for A ONE CONFECTIONERY

Quantitative Analysis:

EXHIBIT-1
Total Capacity
KCPL Production
(Tonne)
Pearson share

240

Fixed Costs

120
50

Unused capacity

70

Permanent Salary
Interest Per month
Other Fixed
Commitments
Total Fixed Costs

Operating
Consump
Expense
tion
Price
Cost
Maida (50 kg bag)
750
500
900000
Vanaspathi (15 kg
tin)
150
520
624000
Sugar (100 kg bag)
200
1200
288000
Preservatives &
pkg
Labour
Total Operating
Expense

Revenue
Sales per month
(tonne)
Price
Total sales
Profit

1000
300

120
18100
2172000
-141000

120000
36000
196800
0

275000
10000
60000
345000

EXHIBIT-2
Total Capacity KCPL
KCPL Production
(Tonne)
FOR APL
Unused capacity

Operating
Expense
KC
PL

Percenta
190 ge
120
70

63.16%
36.84%

217895
127105

Consumpt
ion
Price

Cost

Fixed Costs
Permanent Salary
Interest Per month
Other Fixed
Commitments
Total Fixed Costs

275000
10000
60000
345000

Profit
calculations

Maida (50 kg bag)

Vanaspathi (15 kg
tin)

750

490

882000

150

500

600000

Price

Sugar (100 kg bag)

200

1150

276000

Total sales
Profit/loss

18100
217200
0
40105

Conversion
charge/kg

1.5

Preservatives & pkg

Labour
Total Operating
Expense

1000
300

Maida (50 kg bag)

Vanaspathi (15 kg
tin)

700
140

KCPL revenue

Sales per month

120

120000
36000
191400
0
21318
95

Total Cost
AP
L

Fixed
cost

490
500

480200
326667

Profit
calculations
Contract with APL

Sugar (100 kg bag)

Reimbursement
Labour
Total Operating
Expense
Total Cost
NET PROFIT PER
MONTH

190
300

1150

152950
95981
7
21000

Revenue from APL

contract

105000

Cost for conversion

Profit/loss

148105
-43105

980817
11079
22
-3000

Qualitative Analysis:
Pros:
No expenses on advertisement, attracting customers or brand building.
Regular income
Low Risk
Process modification
Cons:
No independence in decision-making
Contract will bind KCPL to continue business as CMU for 3yrs
Brand Dilution
If ACL asked to change production process or equipment then capital expenditure will have to be made by KCPL
Pearsons reaction may not be conducive
APLs inexperience in dealing with small plants
2.Re-structuring the production process and introduction of mechanized process
Qualitative Analysis:
Benefit:
The company will be able to utilize production capacity by increasing production and the cost of production will reduce. It
can also change process to educe wastage (Now it is having 70Kg of wastage in raw material as compared to APL). They
can improve the process using 5S methodology.

Pros:
Automation can be brought in
Increase in quality checks
No restriction of time to use machinery
Production cost will reduce
Increased Cleanliness would enhance quality
Cons:
Capital will be required and at present company may not be able to afford capital expenditure.
Availability of skilled labor to operate machines
High risk of investing in machinery
3.Increase HR policy and enhance supply to canteens of institutions:
Qualitative Analysis:
The margins of profits will be low but if sales are made to canteens of institutions the expenses on advertisement and
others to increase sales will reduce and so the profits will increase (Now they can only cater 360 tonnes, when demand is
2400 tonnes). 50% absenteeism can be reduced and this in return would increase per day production.
Pros:
Reduction in promotion expenses
Regular supply
Production in accordance to requirements
Potential to compete on quality and cost as the competitors have not entered this market segment
Cons:
In order to compete on cost basis the quality may be ignored
Canteens are not bothered about quality and only consider cost as important
No impact on brand name
Recommendation:
The KCPL should go ahead and sign the contract manufacturing agreement with the APL and ripe the benefit from APL for its
expertise in managing large company, effective production process and technical expertise. If KCPL delay its decision, it may
lose out the opportunity to others companies, w h i c h w e r e i n , talk with APL. They can also conduct training sessions for
reducing wastage, rejections, enhance hygiene and improve labor relations. As per Exhibit-1 they were making a loss of

Rs1,41,000 but now that can be reduced to Rs3000. This would definitely improve to profit, as they tend to achieve
economies of scale. There is also a possibility of not going for renewal of contract after 3 years and work as MKG brand.
Limitations in the case:
1. It is not mentioned if the secret ingredient of APL can be used by KPCL for MKG brand.
2. Shift hours of workers not mentioned
Assumptions:
Arrangement with Pearson health drinks limited is not included in any calculation, as that remains same before and after
the decisions.