Accounting for Business Management
Case Study-2
Pepe Denim Case
20MBAGEN023
MUKUL KARANDE
Under the guidance of, Dr. Rohini Sawalkar.
CASE: PEPE DENIM
Introduction
This case discusses a business situation in which the profits of Pepe Denim, a jeans
manufacturer in India, declined despite consistency in the sales of jeans, because of
competition from other similar products. Competition led to a reduction in the selling price
and rise in cost, resulted in decreasing profits. In such a situation, the company decided to
add two new product lines - Denim Handbags and Denim Skirts which would require the
same type of raw material and the same labour. Therefore, the case is on the costing of new
products in Pepe Denim who were facing tremendous pressure to improve the financial
position of the company.
Case Facts
Pepe Denim was founded in 1984 by Kesar Bajaj and his brother Dinkar and in 1994, they
converted the company from private to public limited company.
Pepe Denim started with just one factory and now owns more than 300 stores across the
country and also exports to various countries like China, Brazil and Nepal.
Pepe Denim was doing good business till 2007 and sales were also increasing every year,
but after 2007 the stock prices of the company started to decline, though sales were constant
then also profits started to fall.
The company thought it was due to 2010 slowdown and recession but profits continued to
decline even after 2010 even when the economy had started reviving, stock indices had
started rising and the stock prices of other companies had also started rising.
The 2010 problems continued and so shareholders raised concern in board meet and Kesar
Bajaj under pressure called Vipin and Sneha, cost accountant and marketing head respective
respectively.
After the suggestions and ideas given by Sneha of adding the new product line, the
company again rose as Bajaj calculated the profit before tax percentage on sales and it
worked out to be 23.25 that is 4.25 per cent higher than the previous year’s profit. This
improvement in profit gave him some satisfaction.
Question and Answers
Question: 1) Vipin told Kesar Bajaj that a 6 % decline in profit on sales was expected in
2011. If the given information is correct then what would be the selling price of a pair of
jeans for the year ending March 31, 2011?
Answer:
COST SHEET FOR THE YEAR ENDED 31ST MARCH,2011
Amount (₹)
Particulars 2010 2011
capacity (in units) 15,00,000 20,00,000
Cost per unit AMOUNT Cost per unit AMOUNT
Direct Wages 180 2,70,000 144 2,88,000
Direct Material 220 3,30,000 148.50 2,97,000
Prime Cost 400 6,00,000 292.50 5,85,000
Add: Factory
216.67 3,25,000 216.66 4,33,318.33
overheads
Works Cost 616.67 9,25,000 59.16 10,18,318.33
Add:
Administration 136.67 2,05,000 61.5 1,23,000
Expenses
Cost of
753.33 11,30,000 570.66 11,41,318.33
Production
Finished goods
Cost of Goods
753.33 11,30,000 570.66 11,41,318.33
Sold
Add: Sales
60 90,000 60 1,20,000
overhead
Cost of Sales 81.33 12,20,000 630.66 12,61,318.33
Profit 186.67 2,80,000 131.6 2,63,200
Sales 1000 15,00,000 762.26 15,24,518.33
The selling price of a pair of jeans for the year ending March 31, 2011= 762.26
Working Notes:
Direct wages= 180- 20%= 144
Direct Material 3,30,000
Less: 25% 82,500
2,47,500
Add: 20% 49,500
2,97,000
Selling price per unit= 2,97,000 /20,00,000= 148.5
Administration Expenses= 205000- 40%= 123000
Sales Overhead= 60*2000= 1,20,000
Factory Overheads= 32,50,00,000 – 45000(Fixed)/15,00,000*20,00,000
= 43,32,73,333.33 + 45,000 = 43,33,18,333.33
Production and Sales= 15,00,000*1/3= 20,00,000
Profit= 2,80,000-6%= 2,80,000-16,800= 2,63,200
Selling Price of a pair of jeans= 15,24,518.33/2000=762.26
Question: 2) Can you help Kesar Bajaj in getting the total cost estimate of all the three
products – Jeans, Denim Skirts, and Denim Handbags? If yes, what is the total cost of
all three products?
Answer:
Denim
Particulars Jeans Denim Skirts Handbags
Opening Stock of Raw material 2,00,000
Add: Purchase 6,00,000 3,00,000 1,00,000
Add: Carriage on Purchase 12,000 6000 2,000
Less: Closing stock (150000) (75000) (25000)
Raw material consumed 6,62,000 2,31,000 77,000
Less: sale of material (25000)
Add: Production wages 3,00,000 1,20,000 1,80,000
Prime cost 9,37,000 3,51,000 2,57,000
Add: Factory overheads
Dyeing and water charges 3,000 1500 500
Rent, rates, taxes, and insurance 12,000 6000 2,000
Manager’s salary 10,000 6900 5,000
Repairs of plant, machinery, and tools 8,000 4000 1,600
Depreciation was written off on plant,
machinery, tools 9,000 3000 2,000
Salaries 15,350 10,000 5,000
Works cost Incurred 9,94,350 3,82,400 2,73,100
Add: Opening work in progress 1,00,000
Less: closing work in progress (35,000) (10,000) (5,000)
Works cost 10,59,350 3,72,400 2,68,100
Add: Administration overheads 25,000 15,000 5,000
Rent, rates, taxes, and insurance 2000 700 300
Depreciation was written off on office
furniture 1800 400 200
Director’s fees 15000 7000 3000
Gas and water charges 850 300 100
General charges 12750 5000 3000
Manager’s salary 8000 5000 2000
Cost of Production 11,24,750 4,05,800 2,81,700
Add: Opening of finished goods 3,50,000
Less: Closing of finished goods (4,50,000) (2,00,000) (1,20,000)
Cost of Goods Sold 10,24,750 2,05,800 1,61,700
Add: Selling and Distribution overheads
Carriage on sales 13000 5000 2,000
Traveling expenses 7000 5000 3,000
Traveller’s salaries and commission 20000 13000 7,000
Advertising 28000 21000 8,750
Cost of Sales 10,92,750 2,49,800 1,82,450
Total cost 15,25,000
Profit 4,75,000
Sales 20,00,000
Total cost estimates The total cost of all three products =15,25,000
10,92,75
Jeans 0
Skirt 2,49,800
Handbag 1,82,450
15,25,00
Total 0
Question: 3) You are required to reconcile the profit with the income statement.
Answer: This question requires the use of income statement Given in Exhibit 2 And the cost
sheet.
Reconciliation of the profit with the Income statement:
Particulars Amount
Profit as per cost sheet 4,75,000
Less: Bad debts 10,000
Profit as per Income Statement 4,65,000
Question: 4) Do you think the decision of the company to add two new products was
beneficial? If yes, how?
Answer: Yes, it is beneficial to add two new products as they will generate greater income
than that of the previous version. Also, there is an increase in profit as compared to the
previous year therefore so it is beneficial.
The profits have increased a lot due to the new product line as we can analyse that while the
crisis was their profits were 19 and then it rose to 23.25 after the new product line which is a
positive effect of 4.25% for the company.
Recommendations
The company did so well in one year, there are very fewer points to recommend to the
company and those are:
The company should introduce more product lines which would help in increasing their
sales and target market as well but should use the same raw materials as Pepe jeans, to
increase their profits even more in future.
They should always keep an eye towards what their competitors are doing because in
2010 also because of the competition from their rivals their stock price and profits
declined.
They should also attract more customers and should provide them with discount offers,
attractive deals and at the same time, the company should follow new trends.
Conclusion
In this case, the company Pepe Denim faced tremendous pressure to improve the financial
position and its market valuation. The shareholders of the company were also raising
concern about the financial position of the company.
Sneha’s analysis and suggestion of adding new product were indeed one of the successful
decisions made by the company as the introduction of the new products had a positive
impact on the company’s profits.
Therefore, this case shows that analysing our competitors and following the new trends is
important in any form of business.
