9/8/2020 Varun Nagar

Cooperative Society
[Document subtitle]

MacMafia
AVINEESH ARORA (07), SAMADRITA DAN (39), SHIVALLI
ARUN (45), SRAJAN TIBREWAL (52), VEDANSH DUBEY (57),
VIDUSHI JAIN (59)
Executive Summary

The central idea of the case was the dilemma that Varun Nagar Agricultural Cooperative Society’s
Manager, Mr Agrawal was facing in March 1991, regarding the current finances of the co-operative,
the stock of 100 tons of paddy with the co-operative and the offer received from National Fertilizer
Corporation for fertilizers at a discounted rate if bought early. The co-operative had an overdraft
from the bank to the tune of Rs. 5 lakhs since September 1990 and the amount Rs 5 lakh was due
to the farmers by the end of March. The co-operative had a cash balance of Rs 5 lakhs after operating
expenses. The manager had taken part in the executive committee meeting, where one of the
executives suggested to him that the paddy could garner higher rates between Rs6000 and Rs7500
per ton if sold after six months, and Mr Agrawal himself had witnessed the rates to be as high as
Rs 6300 in October in the previous year as well.

Moreover, The National Fertilizer Corporation had offered 2000 bags of fertilizer at the rate of Rs
250, which is usually bought at Rs 300, but only if bought till the end of the first week of April
1991. We assessed various alternatives as to how Mr Agrawal can make decisions in these matters
where our first and necessary priority was paying the farmers on time. The different alternatives we
discussed had variations in paying the bank for an overdraft, selling of paddy, and if fertilizers were
to be bought or not. After all consideration, the solution that we decided upon was one where we
pay the farmers in full from the cash balance, do not buy the fertilizer, sell 4 tons of paddy to get
the insurance amount required for paddy, sell the remaining 96 tons of paddy in October and then
repay the bank Rs 555000 including interest. The net gain for the co-operative would range between
Rs 21,000 and Rs 1,65,000 depending on the price of paddy in October, which is more than the
other alternatives we evaluated and hence this is our proposed solution.

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Introduction:

Mr Agrawal, the manager of Varun Nagar Agricultural Cooperative Society, needs to make certain
decisions in March 1991 which are crucial to the co-operative. The co-operative has used an
overdraft of Rs 5 lakhs from Jaldhara District Co-operative Bank on which 10% interest has been
charged since September 1990. The payment of Rs 5 lakhs to the farmers is also due by the end of
March. The co-operative also has in storage 100 tons of paddy for which the current selling price
is at Rs 5000. A member of the executive committee of the co-operative has suggested that selling
the paddy in October will fetch a rate between Rs 6000 and Rs7500. Also, the National Fertilizer
Corporation has made an offer to the co-operative where-in they can buy 2000 bags of fertilizer at
Rs. 250, which would later be available at Rs. 300 after six months. The manager needs to take the
most profitable route while also keeping in mind the benefit of all stakeholders.

Problem statement:

Due to limited resources available, Mr Agrawal has to take decisions in regards to -

● Sell the paddy now or retain it for 6 months.

keeping in mind the best interest of the members of the society.

Statement of Objective(s)-

1. Running cooperative in the interest of the farmers.

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Criteria:

1. The farmers have to be paid in full on or before 31st March 1991.

Assumption:

1. The selling price of paddy after 6 months will be equal to or above Rs 6000.

Alternatives:

(a) Sell all the crop, buy the fertilizers

(b) Sell all the crop, don’t buy fertilizers

(c) Don’t sell the crop, buy the fertilizers

(d) Don’t sell the crop, don’t buy the fertilizers

(e) Partial sell the crop, buy the fertilizers

(f) Partial sell the crop, don’t buy the fertilizers

(g) Partial sell the crop, Partial pay to farmers and buy the fertilizers

Evaluation of the Alternatives-

a) Sell all the crop, buy the fertilizers-

Cash in hand= Rs.5,00,000

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 Cost of paddy crop= 5000/ton

Quantity of paddy crop =100ton

Total Earnings = 5000*100= Rs.5,00,000

Cost of 2000 fertilizer bags @Rs.250 per bag(discounted price) =Rs.5,00,000

Annual Insurance cost=Rs.20,000

Labour and Equipment cost=Rs.25,000

Total interest payable to the bank= Rs.54,167 (13 months overdraft interest)

Total expenditure to buy fertilizers =54,167+25,000+20,000+ 5,00,000= Rs.6,00,167

But cash in hand is only 5,00,000.

So, we won’t be able to pay the remaining amount of Rs 100167.

Hence, it won’t be feasible to implement this alternative.

(*Analysis of buying fertilizers at a discounted price-

Cost of buying fertilizer bags, sold at Rs.300, in September= Rs.6,00,000

While if we go for a discounted price to buy fertilizers the net gain will be:

Cost of fertilizer= 5,00,000 + 20,000 + 25,000 + 25,000 + 3000 =Rs 5,73,000

But, As given, the loss is 5% in available stock, but as we have ensured the fertilizers, we’ll recover the cost of loss i.e,
100*250 = 25000, then we’ll buy 100 bags @Rs.300=Rs.30,000 so the net additional cost will be Rs.5,000.

Hence the net money saved from fertilizers= 6,00,000- 5,73,000 - 5,000 = Rs 22,000)

b) Sell the paddy crop and do not buy the fertilizer

Cost of Paddy crop= Rs.5000*100=Rs.5,00,000

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 Hence by this amount, we will be able to pay the farmers

Cash balance= Rs.5,00,000

Interest charged at 10% rate for 7 months=Rs.29,167

Total amount to be paid now= 5,29,167

Using the existing cash to pay 5,00,000 to the bank but yet 29,167 will be left and we don’t
have enough balance. So, this alternative won’t be feasible.

c) Don’t sell the crop, buy the fertilizers

We will pay the farmers from our cash balance which is our first priority. If we don’t sell
the crop, then our cash balance will be zero and we won’t have money for any other
expenses.

Hence, we won’t be able to buy fertilizers.

d) Don’t sell the crop, don’t buy the fertilizers

We will pay the farmers Rs.5,00,000 from our cash balance which is our first priority. If we
don’t sell the crop, then our cash balance will be zero and we won’t have the money to pay
the insurance cost for storing the crops.

Hence, this alternative is not feasible to afford the expenses.

e) Partial sell the crop, buy the fertilizers

First, we will pay back farmers Rs.5,00,000 the procurement charges from the current
balance. If we buy the fertilizers, we will have to bear the procurement and insurance cost,
which will be greater than the revenue received from the partial crops sold, irrespective of
the proportion.

Hence, this option is not feasible.

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 f) Partially sell Paddy and Do not buy the fertilizer

Quantity of Crops to be sold partially= 4ton

Cost of Paddy Crops (4 ton) = Rs.5000*4= Rs.20,000

This money will be used to cover the insurance amount of Rs.20,000

The cash balance of Rs.5,00,000 will be used to pay the farmers now.

Later, at the end of 6 months, after selling the paddy, the bank will be repaid the amount
along with the interest on the overdraft as- Rs. 5,54,167

The cost of paddy crop per ton will be in the range of Rs.6000 to Rs.7500, as an estimated
market cost by September/October. Hence it will act as the Revenue.

Minimum expected revenue from remaining 96 ton at Rs.6,000= Rs.5,76,000

Maximum expected revenue from the remaining 96 ton at Rs.7,500/ton= Rs.7,20,000

After making a payment of Rs.5,54,167 to the bank which includes the overdraft amount
and interest, the expected profit will be in the range of Rs.21,833 to 1,65,833. Hence in
this alternative, there is a chance of achieving profits in either of the sub-cases.

g) Partially pay farmers, partially sell paddy, buy the fertilizers

Partial Payment to farmers 50% = Rs 2,50,000

Buying Fertilizer, total cost = Rs 5,73,000

Total amount needed = Rs 8,23,000

After using the cash balance, we need working capital of 3,23,000 + 20,000 (Insurance
premium)

No. of paddy to be sold 69 tons @ Rs 5,000 = Rs 3,45,000

Paddy left = 31 tons.

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 Gain from paddy in future range of Rs.31,000 to 77,500

After 6 months

Farmers given 1900 bags @Rs.250, and additional 100 bags @Rs.300

Total revenue from fertilizers sale will be = 5,25,000

Amount recovered from the paddy after 6 months will be in the range of Rs. 1,86,000 to Rs.
232,500

Total amount in the range of (1,86,000+ 5,25,000) = Rs. 7,11,000 to (2,32,500 + 5,25,000)
=Rs. 7,57,700

Liability = 2,50,000 farmer + 5,55,000 to bank = 8,05,500

We are left with liability exceeding even our maximum expected future revenue and
our first priority of paying to the farmers in full isn’t being met as well.

So, this option is rejected.

Selected Alternative -

By choosing the alternative (f) Partial Sale of the crop and not buying the fertilizers, we meet
all the criteria without violating any assumptions. Moreover, we are able to maximize benefits to
the farmers and earn substantial profits.

● Short term implications- we are making transactions smoothly and making profits.
● Long term implications-we are maintaining a cordial relationship with the bank and
farmers.

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Conclusion

The chosen decision for the organization is - Sell the crops partially and do not buy the fertilizers.
This decision fulfils the broad objectives of the organization. The farmers will get full payment
timely and the image and the reputation of the cooperative will be maintained. The best price for
the crops will be fetched. The overdraft amount will also be cleared and this will help to maintain
good relations with the bank. The input cost, in this case, is not too high and the cooperative will
earn profit too. This will help in the smooth functioning of the organization. With minimum
assumptions taken, this decision is the best alternative. Although the price movements of the crop
had been examined over many years, the only risk factor involved here is that the price of the crop
may drop below Rs 6000.