Managerial Communications – II

Varun Nagar Agricultural Cooperative Society

Case

Sec D

Group 14
Amal Babu (2310282)

Sadaneera Kanungo (2310333)

Sagar Khadse (2310334)

Yugandhar Torawane (2310362)

 Abhijith K K (2310380)

Problem Statement:
Mr. Agarwal must take the following decisions on behalf of VNACS in the following week:

1. Whether to pay the farmers for the 100 tons of paddy procured over the year or delay the
payment.
2. Whether to sell the 100 tons of paddy now at Rs. 5000 per ton or wait for 6 months to get a
better price.
3. Whether to buy 2000 bags of fertilizer now at Rs. 250 per bag or not.

Objective:
Varun Nagar Agricultural Cooperative Society (VNACS) has the main objective of providing farmers the
benefit of pooling their produce to send it to district mandies and gain the maximum benefit through
selling their produce. Society also helps farmers to procure agricultural supplies. Society reaps benefits
for the farmers by executing operations together. In this case, the objective is to ensure the maximum
welfare of the farmers and maintain a good image of VNACS.

Analysis:

Pay the farmers

Sell Paddy later Sell Paddy now

Buy fertilizers now Repay the Overdraft

 Balance sheet position as of now
Assets Amount Liabilities Amount
Cash ₹ 500,000.00 Overdraft ₹ 500,000.00
Paddy stock ₹ 500,000.00 Amount due to farmers ₹ 500,000.00
₹
Total ₹ 1,000,000.00 Total 1,000,000.00

Sell paddy now vs Sell after six months

₹
Sell paddy now Market price 5000x100 tons 500,000.00

Insurance cost 20000 x 0.5 ₹ 10,000.00

Store and sell after six months
10% for 6 months on
Interest on OD 500000 ₹ 25,000.00
(procurement cost + Insurance cost + ₹
Break even cost Interest) 535,000.00
₹
Expected Selling price 7500 x 100 tons 750,000.00
₹
Expected profits 215,000.00

Buy Fertilizer now vs Buy after 6 months (Selling paddy now)

₹
Buy after six months cost 2000 bags x ₹300 600,000.00

Buy now and store

₹
cost 2000 bags x ₹250 500,000.00
Insurance cost 0.5 X ₹20000 annually ₹ 10,000.00
 Labor and equipment cost for
storage ₹ 25,000.00
Loss on storage 5% of ₹500000 ₹ 25,000.00
10% for 6 months on
Interest on OD 500000 ₹ 25,000.00
₹
Total cost 585,000.00
Savings on purchasing fertilizer
now ₹ 15,000.00

Criteria:
From the options discussed below, the optimal course of action is decided on the following criteria:

• Ensuring farmer’s benefit.

• Profit maximization.
• Loss aversion.

Alternative Options:
The purchasing of fertilizer presents a decision for society. Even though the discount given seems
substantial (16.67%), a cost-benefit analysis shows that real savings are only 2%. Buying now
necessitates selling the paddy right away, which is considered economically detrimental.

As an alternative, the overdraft might be paid off by selling paddy immediately for Rs. 5 lakhs. After six
months, a breakeven analysis shows that the minimum paddy price should be Rs. 5,350 per ton. Given
that prices have historically increased above Rs. 7,500 have reached as high as Rs. 6,200 and Rs. 6,300 in
previous seasons, there is a good chance that this price will be exceeded.

Considering the financial ramifications and past patterns, it is therefore advised to retain the paddy for
six months before selling it for a possible higher price. This strategy offers a more advantageous result
than buying fertilizer right away and selling the paddy right away.

• Decision regarding paddy:

The society currently has 5 lakhs worth of paddy as their asset, whose sale value is also 5 lakhs
currently. Selling paddy now would mean no profit and no loss for the farmers. If it is decided to
sell the paddy after 6 months, the net worth of the asset will be 5.35 lakhs. From the trends of
the past 2 seasons and the predicted price rise this year, it is definite that society will gain
profits.

• Decision regarding fertilizers:

The Society can buy the fertilizer at a discounted price offered now. The society can use the
money gained after selling paddy to buy fertilizers instead of repaying the bank overdraft. In
 case the society doesn't sell the paddy, they will need to get another loan for buying fertilizer
which is not a feasible option since the borrowing limit had already been crossed.

Evaluation:
• Selling paddy right away will give us 5 lakhs and would meet the breakeven without any profits.
Selling paddy after 6 months will be beneficial and would earn an expected profit of 2.15 lakhs.
• Fertilizer can be bought only if paddy is sold right away. Buying fertilizer now will save us 0.15
lakhs.

Best option:
The best option right now is neither to buy fertilizers nor sell the paddy right away. Society should wait
another 6 months to sell the paddy and gain the profits. In this case they will gain 2 lakhs in monetary
terms after considering the opportunity cost of letting go of the fertilizer deal.

Plan of Implementation:
Reimbursement to Farmers by 31st March 1991:

Make use of the Rs. 5 lakh cash balance that is available to fulfill the farmers' payment obligation by
March 31, 1991. Maintaining society's reputation and the confidence of its farmers depends on this
action.

Decline fertilizer purchase and explain rationale to farmers during payment by March 31, to build trust:

Reject the offer to buy fertilizer for Rs. 5 lakhs at a discount, considering that when all costs are
considered, the minimum savings would only be 2% (or Rs. 12,000. The instant purchase of fertilizer is
not justified by the cost-benefit analysis for farmers.

Controlling the Inventory of Paddy for selling:

To ascertain the minimal anticipated breakeven price for the paddy, perform a breakeven analysis. In
the next six months, the price of paddy is predicted to rise above Rs. 5,350 a ton based on past trends
and current market conditions. To optimize profits, create a strategic plan for selling the paddy after six
months. To take advantage of advantageous selling chances, pay close attention to price patterns and
market conditions. Take into account past data that shows sporadic price surges for paddy, with some
instances exceeding Rs. 7,500 per ton, sell once it reaches desired price.

Contingency Plan of action:

Price slightly below 5,350 but above 5,000:

Negotiate payment terms with farmers: Explain the situation and reason for delaying a portion of the
payment until after selling the paddy. Offer interest if needed on the delayed payment for building trust.
Seek government assistance: Apply for government subsidies or grants available for agricultural societies
and FPOs facing financial difficulties.

Sell a portion of the inventory: Sell enough paddy to cover immediate expenses like needy farmer
payments and overdraft settlement. Hold the remaining inventory for potential price increase.