Bhatt Industries Basic Planning

This case will help the reader and develop an approach to structuring a case solution. It requires 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 percent 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 is a corporation and pays a 30 per cent tax on income, because of the paperwork involved. Mr. Bhatt invests his excess cash on September 6 in one year treasury bonds. He does not invest for shorter periods.