Cooperative Federation Potato Lot: Profit Claim and an Unrealistic Price Target
The Dehradun district cooperative marketing federation bought 800 quintals of potatoes at ₹660 a quintal and spent ₹24,000 on transport, grading and handling, so total cost came to ₹5,52,000. It sold 500 quintals at ₹780 a quintal, and 200 quintals at ₹620 a quintal to a processor. Fifty quintals rotted in the godown and were sold as cattle feed for ₹6,000. Fifty quintals remain unsold at the year-end; comparable stock is fetching about ₹620 a quintal. The agent who arranged all the sales is entitled to a commission of 2 per cent of sales value. The federation's accountant presents a rough note - purchases plus transport ₹5,52,000; sales ₹5,14,000; salvage ₹6,000; closing stock at cost ₹34,500 - and concludes that 'there is a comfortable profit of about ₹26,500'. The managing director, who must report to the registrar, is uneasy and asks you to check the note. She also wants to know whether a target of 12 per cent profit on total cost can still be met by pricing the unsold 50 quintals aggressively.
1. Check the accountant's profit claim and state the correct result for the year, showing every adjustment.
Read the worked answer
Where the accountant went wrong: he added salvage and closing stock at cost to sales and deducted only purchases plus transport, ignoring the ₹10,280 commission and, more importantly, treating the spoiled stock as though it had cost nothing extra. He also valued closing stock at cost when net realisable value is lower.
Correct computation
| Item | ₹ |
|---|---|
| Cost: 800 × 660 = 5,28,000 + 24,000 | 5,52,000 |
| Sales: 500 × 780 = 3,90,000; 200 × 620 = 1,24,000 | 5,14,000 |
| Less: agent's commission 2% of 5,14,000 | (10,280) |
| Add: salvage on 50 quintals spoiled | 6,000 |
| Add: closing stock 50 quintals at NRV ₹620 (cost ₹690) | 31,000 |
| Total realisation | 5,40,720 |
| Loss | 11,280 |
Reasoning on the closing stock: cost is ₹690 a quintal (₹5,52,000 ÷ 800), but the same grade is selling at ₹620, so net realisable value is below cost. Stock must be carried at the lower of cost and NRV, producing a write-down of 50 × ₹70 = ₹3,500. Valuing at cost would have shown a loss of only ₹7,780 and would flatter the registrar's report.
Verdict: the accountant's 'profit of about ₹26,500' is wrong by roughly ₹37,800 and the year actually ends in a loss of ₹11,280, about 2 per cent of cost.
2. The MD wants to know what price the remaining 50 quintals must fetch to earn 12 per cent on total cost. Compute it and advise her.
Read the worked answer
Step 1 - target. 12 per cent of ₹5,52,000 = ₹66,240, so total realisation must be ₹5,52,000 + ₹66,240 = ₹6,18,240.
Step 2 - what is already fixed. Sales of ₹5,14,000 and salvage of ₹6,000 are locked in. Let the price of the unsold 50 quintals be p, so total sales become 5,14,000 + 50p, and commission is 2 per cent of that.
Step 3 - equation. 0.98 × (5,14,000 + 50p) + 6,000 = 6,18,240 0.98 × (5,14,000 + 50p) = 6,12,240 5,14,000 + 50p = 6,24,734.69 50p = 1,10,734.69 → p ≈ ₹2,214.69 a quintal.
Step 4 - sanity check. That is 3.2 times the cost of ₹690 and more than three times the price the processor is paying. Even if the agent's commission were scrapped altogether, the required price would still be ₹1,964.80 (5,14,000 + 50p + 6,000 = 6,18,240 → 50p = 98,240). No local buyer will pay it.
Advice to the MD: the 12 per cent target is arithmetically out of reach at these volumes and is not a pricing problem - no price the market will bear can recover a ₹5.52 lakh cost from 750 saleable quintals that have already realised most of their value. The honest options are: revise the target to the actual loss and explain it in the registrar's report; attack the causes (₹34,500 of stock lost to rot points to a storage failure, and the 2 per cent commission is ₹10,280); and renegotiate the processor price next season. Do not carry the stock at cost to dress up the position.