=3/Mumbai Oaks Consider an Indian business that sells oak barrels to vineyards. At the start of the year, its inventory of finished products was zero. It sold 800 of the 900 barrels it had produced, leaving the closing inventory at 100 barrels. Each barrel sells for INR 10 000. To produce one barrel, the company spends INR 5000 on oak purchases and incurs INR 2000 in labour costs. In addition, the sales force generates costs of INR 450 000 per year and the fully outsourced administrative department incurs costs of INR 400 000 p.a. Annual depreciation expense related to the production facilities comes to INR 300 000. The opening inventory of raw materials was INR 400 000 and the closing inventory INR 500 000. In sum, the business spent INR 4 600 000 on raw materials.

EXERCISES Parts Price Opening inventory Closing inventory Case 50 5 13 Motherboard 200 8 2 Processor 300 4 11 Memory 100 6 4 Graphic card 50 1 13 Hard disk 150 5 10 Screen 200 3 3 DVD combo 50 7 19 40 FUNDAMENTAL CONCEPTS IN FINANCIAL ANALYSIS SECTION 1 Trim Size: 189 X 246 mm c03.indd 07:8:0:PM 08/28/2014 Page 40 Produce the by-nature income statement.

Assuming that depreciation breaks down into INR 200 000 for the production machinery, INR 70 000 for the sales facilities and INR 30 000 for the administrative facilities, produce the by-function income statement. Are you surprised that both formats give the same EBIT? Why? What do you think about Mumbai Oaks’s EBIT margin?