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Financial Management



                      Notes
                                        


                                       Case Study  Case: Bhatt Industries Basic Planning

                                          his case will help the reader,  develop an approach to structuring a case solution. It
                                       Trequires a logical approach to solving a general financial problem.
                                       Bhatt  Industries  has  been  manufacturing  fireworks  at  a  small  facility  just  outside
                                       Greensboro, North Carolina. The firm is known for the high level of quality control in its
                                       production process and is generally respected by distributors in the states, where fireworks
                                       are legalized.  Its selling  market is  fairly well  defined; it  has the  capacity to  produce
                                       800,000 cases annually, with peak consumption in the summer. The firm is fairly confident,
                                       that the whole of next year’s production can be sold for   25 a case.
                                       On September 7, the company has    8,000,000 in  cash. The firm has  a policy against
                                       borrowing, to  finance its  production, a policy first established by  William Bhatt, the
                                       owner of the firm. Mr. Bhatt keeps a tight rein on the firm’s cash and invests any excess
                                       cash in treasury bonds, that pays a 12 per cent return and involve no risk of default.
                                       The firm’s production cycle revolves around the seasonal nature of the fireworks business.
                                       Production begins right after Labour Day and runs through May. The firms sales occur in
                                       February through May; the firm closes from June 1 to Labour Day, when its employees
                                       return to farming. During this time, Mr. Bhatt visits his grandchildren in New York and
                                       Pennsylvania. As a result of this scheduling, the firm pays all its expenses during September
                                       and in May receives, all its revenues from its distributors within 6 weeks after the 4th of
                                       July. The customers send their checks directly to Kenmy National Bank, where the money
                                       is deposited in Bhatt’s account.
                                       Mr. Bhatt is the only full-time employee of his company and he and his family hold all the
                                       common stock. Thus, the company’s only costs are directly related to the production of
                                       fireworks. The costs are affected by the law of variable proportions, depending on the
                                       production level. The first 100,000 cases cost   16 each; the second 100,000 cases,   17 each;
                                       the third 100,000 cases,   18 each and the fourth 100,000 cases,   19 each ; the fifth 100,000
                                       cases,   20 each; the sixth 100,000 cases,   21 each. As an example, the total of 200,000 cases
                                       would be   1,600,000 plus   1,700,000 or   3,300,000.
                                                      BHATT INDUSTRIES—INCOME STATEMENT
                                                             (August 31, fiscal year just ended)

                                        Revenues from operations                                 50,00,000
                                        Revenues from interest on government bonds               9,20,000
                                        Total revenues                                           59,20,000
                                        Operating expenses                                       40,50,000
                                        Earnings before taxes                                    18,70,000
                                        Taxes                                                    9,48,400
                                        Net income after taxes                                   9,21,600



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