MANAGERIAL ECONOMICS

Name - Ravi Kumar Roll No. NA12043

Project Profile Setting Up of a Nonwoven Bag Making Unit Objective To Study Break Even Quantity Introduction
General Information about Nonwoven and its Application: Nonwoven fabric is a fabric like material made from long fibers, bonded together by thermo mechanical process. The term is used in the textile manufacturing industry to denote fabrics, such as felt, which are neither woven nor knitted. Nonwovens have become an alternative to Plastic packaging material. Nonwovens are used in several fields. Some of the applications are given below Packaging: 1. Retail Carry Bags 2. Bags for rice and flour 3. Gift Bags, Laundry Bags etc. 4. Wrapping & packing of Metal & plastic pipes and profiles, Paper, garments etc. Hygiene: 1. Baby diapers or nappies & feminine hygiene products. Medical: 1. Caps, Gowns, Masks, Shoe cover and draping used in the medical field 2. Medical Packaging Agriculture: 1. Shed nets, crop nets 2. Ventilation screens, fruit nets etc Other: Disposable bed & table cover, apparel interlining, civil engineering fabrics, roofing products, carpeting and upholstery fabrics, padding and backing, wall coverings, laundry aids (fabric dryer sheet etc.

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Market potential for the Non-Woven product: Now a days government has banned use of polythene bags because of environment concerns. Nonwoven bags are fast replacing polythene bags in the retail sector. There are very few bag making units in Odisha and its neighboring states. With availability of bags in the local market, the retail segment would gradually shift to nonwoven bags. Creation of market for nonwoven depends upon the entrepreneurs ability to push the same in the market. Apart from retail segment, the nonwoven bags are being widely used as fancy bags, gift bags etc. In a small township with 50000 populations, the use of carry bags by retailers could be to the tune of 10000 pcs per day. If the nonwoven bags take 20% of that market potential the use could be 2000 bags per day. Assumption for this project: S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Particular PP Non-woven Fabric Price (Rs/Kg) Selling price of Bag (Rs) Printing Cost per bag (Rs/bag) Rate of wastage Weight per bag Production rate (no. of pieces / day / per machine) No. of working hours per day No. of working days per month No. of working day in a year No. of stitching man required Monthly salary for each stitching man Operating efficiency Area required for the project Rent of that area is on and around No Income Tax for all calculations. Wastage sales are not considered for this project. Machine cost (Rs/Machine) Value 122 220/Kg or 11/bag 1.5 1% 50gm 200 8 25 300 3 3000 75% 500 Sq. ft. 2000

7000

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Some More Assumption Regarding Production S.No. Particular Production in a month (at 75% capacity) @ 150 pieces 1 per machine per day 150 X 3 X 25 days 2 3 Raw material required per month @ 50 gm per bag x 11250 bags) Consumables, spares etc. (thread, needle, bobbins, oil)

Value 11250 bags 562.5 Kg @ Rs 122/Kg Rs 50 / day

INVESTMENT Capital Requirement S.No. 1 2 3

Particular

Amount (Rs) 21000 10000 69000 100000

Cost of Stitching Machines (7000 X 3) Investment in furniture, fixtures & tools Investment for working Capital for 30 days Total Investment

Note: Bank loan is not considered for this project. Administrative Cost and Other Cost (per month) S.No. Particular 1 Rent 2 Other Administrative & Selling Expenses (280 X 25) Total Fixed cost (per month) S.No. Particulars 1 Rent 2 Other Administrative & Selling Expenses (280 X 25) 3 Depreciation on machinery @ 15% 4 Depreciation on Furniture & Fixtures @ 10% Total Variable Cost (per month) S.No. Particular 1 Raw Material (562.5 x 122) 2 Consumables & Spare Parts(50 x 25) 3 Printing Cost (11250 x 1.5) 4 Labour Cost (3 Person) Total

Amount (Rs) 2000 7000 9000

Amount (Rs) 2000 7000 3150 1000 13150

Amount (Rs) 68625 1250 16875 9000 95750 Page 3 of 6

Total Capital Investment S.No. Particular 1 Total fixed Assets 2 Working Capital (for 1 Months) Total

Amount (Rs) 100000 104750 204750

Financial Analysis
Cost of production (per month) S.No. Particular 1 Total recurring cost per month 2 Depreciation on machinery @ 15% 3 Depreciation on Furniture & Fixtures @ 10% Total 1. Total Sales (per month): No. of bags manufactured / months = 11250 Total Revenue/Month = Rs (11250 X 11) = Rs 123750 2. Net Profit (per month) (Before Tax) Profit = Total sales Cost of production = Rs (123750 108900) = Rs 14850 3. Profit Ratio = Net profit X 100 / Total turn over = 14850 X 100 / 123750 = 12 % 4. Rate of Return = Net profit X 100 / Total Investment = 14850 X 100 / 204750 = 7.25 % Amount (Rs) 104750 3150 1000 108900

Break Even Point Analysis

It is carried out to determine the minimum quantity of product to be produced to have no profit no loss condition of the company. Break - Even Point: The break-even point is the level of activity where the total revenue is equal to the total cost. At this point, all costs (variable as well as fixed) are recovered from the sales values. The business, therefore, does not make profit or loss. For any activity below break-

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even, the business will incur loss. Hence, in order to make profits, a business must continue to produce output beyond its break-even point. It is assumed that both price (P) and variable cost per unit (AVC) are constant over a range of 1125-11250 bags in the short run of 1month. Calculation of Break - Even Quantity: Q Profit = (Total Revenue - Total Cost) = TR TC = P X Q - (Total Fixed Cost + Total Variable Cost) = P X Q [TFC + (AVC X Q)] 1 At Break Even point, the company does not earn any profits on that business. Therefore, Profit = 0 Substituting the value of profit in equation 1, we have 0 = P X Q [TFC + (AVC X Q)] => P X Q = TFC + (AVC X Q) => P X Q - AVC X Q = TFC => Q (P AVC) = TFC => Q = TFC / (P AVC) Where: TFC = Total Fixed Cost P = Price per unit of product AVC = Average Variable Cost Table 1: Production Cost Data for Short Run (1 Month) No. of Bag (Q) 0 1125 2250 3375 4500 5625 6750 7875 9000 10125 11250 Price/Bag (P) 11 11 11 11 11 11 11 11 11 11 11 Total Revenue (TR) 0 12375 24750 37125 49500 61875 74250 86625 99000 111375 123750 Total Fixed Cost {(TR) = (P)*(Q)} 13150 13150 13150 13150 13150 13150 13150 13150 13150 13150 13150 Total Total Cost Variable {(TC) = Cost (TVC) (TFC+TVC)} 13150 9575 22725 19150 32300 28725 41875 38300 51450 47875 61025 57450 70600 67025 80175 76600 89750 86175 99325 95750 108900 Average Variable Cost (AVC) 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 Page 5 of 6

Note: It is assumed that both price (P) and variable cost per unit (AVC) are constant over a range of 1125-11250 bags in the short run of 1month.

Calculation of the Break Even Quantity for the Project

Substituting corresponding values from Table 1 in equation 2, we have Q = 13150 / (11 8.5)

Q = 5260

140000 120000 100000 Amount (Rs) 80000 60000 40000 20000 0 0 2000 4000 6000 8000 No. of Bag 10000 12000
Break Even Point

Total Revenue Fixed Cost Variable Cost Total Cost

Hence, the company will be in no profit - no loss condition, when it will produce 5260 quantity of bags. Above this quantity, the company will start to have profit in the business.

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