Sukkur Institute of Business Administration University by Unknown Author is licensed under

Airport Road Sukkur, Sindh, Pakistan

SheMir Sugar Mills Limited, Kandhkot, Pakistan.
This case has been written by the students of BS Accounting & Finance, 7th semester, Aafaque Ali and
Abdur Rehman under the supervision of Mr. Sajjad Ahmed Mahesar, Lecturer at Sukkur IBA
University. The aim of the case is to provide the students with the material used extensively for the class
discussion. The information included in this case has been collected from SheMir Sugar Mills
Ltd.Kandhkot. The authors do not intend to illustrate effective or ineffective handling of managerial
situations. The authors have disguisedcertain names and other identifying information to protect
confidentiality.
Introduction:
This case is designed to help undergraduate accounting students better understand how cost-volume-profit
(CVP) analysis can be used to make real-world business decisions. According to Brewer, “Cost-volume-
profit (CVP) analysis helps managers make many important business decisions such as what products and
services to offer.”. In this the financial situation of a company is discussed and to determine how much to
sell to earn desired income or to achieve breakeven. Studying CVP analysis in a real-world context
enhances student understanding of the topic and allows students to understand that CVP can be used to
assist managers when making a wide array of business decisions.
Case Background:
It was July of 2020. Mr. Aafaque Ali who recently earned his MBA degree from Lahore University of
Management Sciences (LUMS) was appointed as a finance manager of SheMir Sugar Mills Ltd. located in
District Kandhkot. Three months had passed since he joined the company. By the time, he thoroughly
went through the operations of the company alongwith the last year financial statements and current year
financial statements, what he observed made him extremely shocked at first. He analyzed that the profits
had turned into lossesin 2018 as compared to 2017 and that the financial cost of the company had
increased to a greater amount. As a result, the company was faced with millions of losses and declining
earnings per share. Resultantly, there was a huge cry from the shareholders. He thought that he must look
for the possible reasons deteriorating image of the company.
Introduction of the company:
SheMir Sugar Mills Limited (“the Company”) was incorporated in Pakistan on 22 August, 1985 as a
private limited company and it was subsequently converted into a public limited company on 15
September 1995. It is nowlocated in district Kandhkot. Its shares are listed on the Pakistan Stock Exchange
Limited. Its principal line is to produce and sell the crystalline sugar, electricity and managing corporate
farms. It has a pride in taking the social responsibilities activities,i.e., development of women enterprise,
social mobilization, supporting primary and technical education, development of infrastructure etc. These
activities have the motive to ameliorate the economic and social conditions of the poor in rural areas.
Also,SheMir Sugar Mill is one of the largest sugar sectors contributing about 15-17% of Pakistan’s sugar
production.
Furthermore, the company principally earns revenue from selling sugar, electricity and agriculture produce
in the domestic market;the revenue is also generated from exporting the sugar in the international market.

Principal Risks

Currently,SheMir Sugar Mills Ltd. faces thefollowing majorrisks:

• Supply and Demand risk
• Depressed Sugar Sales Prices
• Higher Sugarcane Procurement Prices
• Borrowing Costs
• Foreign Currency Fluctuations
• Delay in Payments of Government Subsidies
Main Issues and reasons thereof:
Mr.Aafaque Ali was trying to come up with the reasons behind the loss of the company as it was faced
with a multiplicity of serious issues (See Exhibit 1). Majorly, the company experienced a gross turnover
that had declined significantly by 19.44%.This significant decline occurred due to the decrease in average
selling price of the sugar and molasses, and the sales quantity of sugar reduced by 18.62% in this year.
He further analyzed that the company earned loss after tax of Rs. 203 million as compared to profit after
tax of Rs. 1,588 million in the last year, resultantly earnings per share wasreduced from Rs. 26.57 to loss
per share amounting to Rs. 3.40 (See Exhibit 2).This huge decline in the profitability was subject
tounfavorable sugar prices thatwent onunfavorable throughout the year owing to surplus availability of
sugar in the country. Also, the molasses prices wereunfavorablebecause of high production.
Secondly, he noticed that SheMir Sugar Mill Ltd. was among the very few mills in Pakistan that purchased
sugarcane at notified/support prices declared by the provincial government/Sindh High Court which
increased its production cost as compared to rest of the Mills.
Thirdly, sugar price rate set by the FBR for sales tax purposes was higher by approximately Rs: 15 per kg
than the actual market price that for a group like themhad adversely affected their profitability in the
current year.
Moreover,he observed that the selling prices of the sugar was declining (see Exhibit 1). Also, the
company was recovering low sugar from the sugarcane that was supplied by the farmers. Although the
company produced sugar in a great amount, yet it did not sell in the market, and ultimately high production
proved costly for the company in the current period.
Another significant issue that Mr. Aafaque Ali noticed was the increase of financial cost amounting to Rs.
604 million (see exhibit 2), of the Company in the current year due to carriage of more unsold stocks, non-
receipt of export subsidies from Federal & Provincial Governments and increase in receivables from
CPPA-G (Central Power Purchasing Agency) on account of export of electricity which caused more
utilization of working capital lines in the current year to meet working capital requirement. The significant
increase in KIBOR was also another reason contributing to an increase in the financial charges (See
Exhibit 1).

Future prospects:
Having analyzed the internal operations of the company, he called a meeting with management where he is
going to present some future prospects for the company in order to earn breakeven and required increase
of 1 billion rupees in profit in next year to come so that the financial health of the company can be
achieved. For this, he suggests a CVP analysis technique in order to determine cost and volume of sugar
that can help achieve breakeven point and or 1 billion rupees increase in profit in next year. See exhibit 3.
Task:
After going deeply through the issues and the reasons of current year’s losses, Mr. Aafaque Ali decided to
discuss all these issues and thereby recommend the possible solutions for variances and to use CVP
concept to determine how much ton to sell and achieve breakeven or desired income.

Assignment Questions:
1. What are the observations noticed by Mr. Aafaque Ali? To what degree are they problematic
for the company in the long run? List each of them.
2. Determine the year 2019 breakeven point in rupees for Al SheMir Sugar Mills Ltd. Based on
that breakeven point, determine SheMir’s margin of safety and profit/loss for year 1.
3. Determine the year 2020 units required to meet management’s desired income of 1 billion rupees.
Based on that required number of units, determine by how much SheMir’s will exceed or fall short of
their target income.
4. Besides the analysis in Student Assignments 1 and 2, make a list of other financial and qualitative
factors that SheMir’s executive team should consider when deciding whether to expand or not.
5. Calculate the spending and revenue variances for the two years for the company and suggest
the possible solutions.
6. Analyze the issues discussed in case and evaluate the impact of those issues in Exhibit 1 and 2.
7. Criticize or justify that the observations raised by Mr. Aafaque Ali would really be an area of
concern for top management or these are just some irregularities that every next organization in
locality is facing itself?
 Exhibit 1
2020 2019
For the year ended 30 September 2020
Rupees Rupees
Restated

Gross sales 40,251,476,355 49,962,324,692

Sales tax and others (2,986,969,986) (4,530,367,689)
Net sales 37,264,506,369 45,431,957,003
Cost of sales (34,148,122,116) (40,807,425,417)
Gross profit 3,116,384,253 4,624,531,586

Administrative expenses (1,033,466,077) (1,099,255,365)

Selling expenses (424,314,254) (84,805,426)
Other income 475,637,156 571,049,173
Other expenses (5,237,703) (166,528,263)
(987,380,878) (779,539,881)
Profit from operations 2,129,003,375 3,844,991,705

Finance cost (2,269,761,395) (1,665,293,789)

(Loss) / profit before taxation (140,758,020) 2,179,697,916
Taxation (62,682,495) (591,301,563)
(Loss) / profit after taxation (203,440,515) 1,588,396,353

(Loss) / earnings per share - basic and diluted (3.40) 26.57

Exhibit 2
 (Rs. inmillion)
2020 2019
Rupees Rupees
Gross Sales 40,252 49,962
Net Sales 37,265 45,432
Operating Profit 2,129 3,845
(Loss) / Profit before Tax (141) 2,180
(Loss) / Profit after Tax (203) 1,588
(Loss) / Earnings per Share (3.40) 26.57

Exhibit 3
Units sold in tons Selling price per ton
Year 2020 649217 62000
Year 2019 892344 55990
Exhibit 4
Exhibit 3