Varun Nagar Case

Executive summary: Varun Nagar Agriculture cooperative society (VNACS) has two assets which include, Rs 5, 00,000 in cash and a paddy stock which is worth Rs 5, 00,000. The liabilities of VNACS include, Rs 5,00,000 to be paid for procurement of paddy to farmers, and Rs 5,29,167 to be paid towards over draft amount this also includes the accrued interest over the period of seven months(Rs 29,167 is the interest to be paid for seven months from September 1990 to march 1991) as the over draft has been drawn September last year. Mr.Agarwal the Manager of VNACS has two make decisions about two business proposals in front of him, whether he should retain paddy stock and whether he should buy fertilizer stock. Mr. Agarwal taking all the option available into consideration decides to retain paddy stock and not to buy fertilizer stock this decision will be in the best interest of Cooperative and farmers at large. Main Report: 1. Situation Analysis: a) Introduction: The case revolves around Mr . Agarwal, Manager of the cooperative (VNACS), other players include the members of the agriculture cooperative, Mr. Dwivedi, the bank manager.The main functions of VNACS are to procure the agricultural produce from farmer members and market it in the district mandis. The society also procured and supplied inputs (seeds, fertilizers and pesticides) to the farmer members. Mr. Agarwal’s objective is to ensure maximum benefit to the farmers through the cooperative and its operations, and also to sustain the society’s good image. Where as being the members of cooperative, the farmers wish is to gain the maximum return of their produce. The branch manager would like to extend the business with the cooperative in the long run. ) Objectives: Mr. Agarwal’s should make decisions which are in the best interest of all the stake holders, whom include, the Farmer members of the society, the Co-operative society and the Bank. The Farmer members should get best price for their agricultural produce and have access to agricultural inputs like seeds and fertilizers at cheaper prices compared to the market price. The Co-operative society should sustain the good image earned over the years, which helped in ensuring the support of the bank, and support of members of the society.Taking the above into consideration the objectives should be * To meet the expectations and also serving in the best interest of farmer members. * To sustain the good image of the Co-operative society in the years to come. * To maintain good relation with Jaldhara District Cooperative Bank, and to remain credit worthy. c) Decision problems: Mr. Agarwal has two decision problems which he should confront in the process of working towards the objectives. * Should he retain the paddy stock? * Should he buy fertilizer? Mr.Agarwal has these two business decision to make, which can contribute towards VNACS’s larger objective of serving the members interest, and his objective to serve VN ACS’s interest in the best possible manner. But due to the limited resources available with VNACS, it gives rise to this situation in which Mr. Agarwal is confronted with these decision problems. His options include holding the paddy for sale in October to get better returns, another option is to buy fertilizer now so that the society can supply fertilizers to the farmer members at a cheaper price in October.The Co-operative is not financially strong to do both, as the payment of Rs. 5, 00,000 to the members towards the procurement of paddy was due by March 31, 1991. Mr. Agarwal’s objective is to serve in the best interest of the farmer members He understands how important it is to make payment to the farmers on time, so he certainly does not want to default on that, come what may. Therefore after the repayment of Rs 5 lakhs to farmer members VNACS is left with the paddy stock which is worth Rs 5 lakhs. Mr.Agarwal under these circumstances should confront the above men tioned decision problems. d) Criteria for decision making: As discussed above, the payment should be made to the farmers on or before the due date, at any cost. He should make a decision which would lead to maximum benefit for farmer members in financial terms, as that was the aim with which VNACS was set up. In the given scenario it is very difficult for the society to get a loan of substantial amount, though society can ask for a small additional loan given the good terms which society has with the bank.Taking above discussed criteria into consideration we can prioritize them as * Payment for the procured paddy should be made to the farmers on or before the Due date * Maximum benefit to the farmers, whether in terms of getting higher price for their agricultural produce of providing access to agricultural inputs at a cheaper price. * To maintain credit worthiness with bank. Society has already taken an over draft of R 5 lakhs, so it is likely that only small amount can be sought a s loan from the banks. * To maximize the total revenue for the Co-operative society . Decision process: a) Generating Alternatives: Mr. Agarwal has two confront with two decision problem, Should he retain paddy stock? Should he buy fertilizer? From these two decision problems we can generate four different alternatives. I. Sell paddy stock now and do not buy fertilizer. II. Retain paddy stock till September/ October, and purchase fertilizer now. III. Retain paddy stock till September/ October, but do not purchase fertilizer. IV. Sell paddy stock now, and purchase fertilizer now. b) Evaluation of Alternatives: I.Sell paddy stock now and do not buy fertilizer: In this alternative buy selling 100 tons of paddy stock at current market price of Rs 5,000 per ton, would mean that buy this sale Society would only be able to repay the procurement cost of paddy i. e. Rs 5 lakh to the farmers which is due for 31st march. Society has an additional cash balance of Rs 5 Lakh, which would go for t he repayment of over draft taken from the bank in September 1990. But the interest for seven months on over draft of Rs 5 lakh, which accounts to Rs 30,000, has to be paid to the bank.Net Result is a loss of Rs. 30,000 In this alternative we are able to meet the first criteria, i. e. the repayment to the farmers, but we are not able to meet the rest criteria II. Retain paddy stock till September/ October, and purchase fertilizer now: This criteria can give us good profit, but taking the current situation of VNACS which has already taken an over draft of Rs 5, 00,000 the bank is most likely will not provide an additional loan. The estimated additional cost to go ahead with this alternative is Rs 5, 68,000. Estimated additional cost in Rupees|Cost to buy 2000 bags of fertilizers = 5,00,000| Cost to insure both fertilizer and paddy stock = 40,000| Labour and equipment cost = 25,000| Rent paid for storage of fertilizer stock = 3,000| Total = 5,68,000| Even though we can gain good return s from this alternative, it is very improbable to mobilize such huge amount, give the conditions. III. Retain paddy stock till September/ October, but do not purchase fertilizer. In this alternative the cash reserve of Rs 5 lakh will be used to repay the procurement cost of paddy i. e.Rs 5 lakh to the farmers which is due for 31st march. We will retain the paddy stock till September/ October, and we would not buy any fertilizer. The minimum safe estimated market price of 100 tons of paddy stock would be Rs 6 lakh. Immediate cost in this alternative will be to insure the paddy stock for the coming year, which would cost us Rs 20,000. This amount can be easily negotiated with the bank, as Manager of the bank was happy with the operations of the Co-operative. Expenditure in Rupees| Cost of procured paddy = 5,00,000| Insurance cost = 20,000|Interest payable to bank = 29,167+ 26,000| Total expenditure = 5,76,000| Minimum expected market price of 100 tons of paddy in September/ October is Rs 6, 00,000. Net Result is a profit of Rs 24,833 In this alternative we are able to meet the first criteria, i. e. the repayment to the farmers. We can meet the second criterion that is to provide maximum benefit to the farmers, by providing the fertilizers at a cheaper price. The market price of fertilizer in September/ October will be Rs 300 per bag, and the society’s annual requirement is 2,000 bags, we can ubsidize each bag of fertilizer by Rs 10, which will cost the society Rs 20,000 that can met from the profit made, and remaining Rs 4,833 can be carried for next year in society’s cash account. An important point to be noted is we are considering the minimum market price observed at that time of the year, if the market price per ton of paddy is Rs 7,500 which has a probability of 25% the society would make huge profits, this profit can be utilized to provide more benefits to the farmer members.Some amount can be saved for future operations of the cooperative. I V. Sell paddy stock now, and purchase fertilizer now: In this alternative the cash reserve of Rs 5 lakh will be used to repay the procurement cost of paddy i. e. Rs 5 lakh to the farmers which is due for 31st march. Sell the paddy stock at current market price hence the current cash balance is Rs 5, 00,000 after selling paddy stock. The expenditure incurred to buy the fertilizer is Expenditure in Rupees| Cost to buy 2000 bags of fertilizers = 5,00,000| Insurance cost = 20,000|Labour and equipment cost = 25,000| Interest payable to bank = 29,167+26,000| Total expenditure = 6,00,167| The market price of fertilizer bag in September/ October is Rs 300, so the total revenue could be Rs 6 lakh, but during this period of six months there are losses of 5% in the total stock. The total revenue considering the losses is Rs 5, 70,000. Net result is a loss of Rs 30,167 In this alternative we are able to meet the first criteria, but failing to meet the rest all criteria. C) Decision: The 3rd alt ernative i. e. o retain paddy stock and not to buy fertilizer meets all the criteria, this alternative earns profit while the rest alternatives are making losses. Hence the 3rd alternative should be the decision of Mr. Agarwal. 3) Implementation: The 3rd alternative fulfills the objective of society with which it was formed that the larger intrest of the stakeholders should be served. This way society is able to pay the farmers the value to its produce as well as build corpus of the society without any significant risk involved. As discussed in the 3rd alternative Mr. Agarwal will retain the paddy stock till September/October