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Lesson 31. ECONOMIC BURDEN PERFORMANCE ANALYSIS: INCOME AND EMPLOYMENT POTENTIAL
Module 16. Dairy Manufacturing Sector, Its Status and Problems
Lesson 31
ECONOMIC BURDEN PERFORMANCE ANALYSIS: INCOME AND EMPLOYMENT POTENTIAL
31.2 Economic Role of Dairying
Table 31.1 Annual household cash income by various sources in different land holding categories
Category 
Dairy (%) 
Crop (%) 
Others 
Landless 
53.08 
0.00 
46.92 
Marginal 
30.14 
46.55 
23.30 
Small 
29.17 
53.75 
16.58 
Small – medium 
26.25 
58.98 
14.76 
Medium 
25.33 
62.77 
11.91 
Large 
19.02 
71.48 
9.50 
31.3 Case Study
31.3.1 Illustrative example for small scale dairy entrepreneur
31.3.1.1 Cost of land & building
For establishing a cottage type/house hold dairy business, a room of at least 15 feet x 15 feet may be required. The rent for the same (small space) may be assumed as Rs. 2000 per month.
31.3.1.2 Cost of equipment
Name of the equipment 
No.s 
Cost (Rs.) 
Multipurpose vat/Kettle of 100 liter capacity with diesel or Gas furnace chulah 
1 
40,000/ 
Milk cans/Pails/ Other containers 
5 
7,000/ 
Cream Separator of 165 lit. capacity 
1 
15,000/ 
Hand cum electric Butter Churn 
1 
8,000/ 
Scrapers & Sweet containers 
1 
3,000/ 
Fat testing machine (hand operated) 
1 
3,000/ 
Deep Freezer (500 liter) 
1 
25,000/ 
Miscellaneous Fixed assets 
 
24,000/ 
Investment in Net Working capital 

25,000/ 

Total Investment 
1,50,000/ 
Particulars 
Cost (Rs) 

Milk 100 Kgs. (6 % fat) per day Considering cost of Fat: 350 Rs/ Kg fat 
63000/ 

Labor charges (2 persons) 
5,000/ 

Fuel Charges 
5000 to 10000 (Variable depending upon type of product to be prepared) 

Electricity charges 
2000/ 

Rent 
2000/ 

Miscellaneous Expenses 
4000/ 


TOTAL 
81000 to 86000/ 







Product combination 
Monthly production 
Selling Price per unit (Rs.) 
Sales Revenue (Rs.) 
Sweet Dahi 
90 Kg 
35 
94500/ 
Ghee 
1.5 Kg 
270 
12150/ 



1,06,650/ 
Sour dahi 
90 Kg 
25 
67500/ 
Ghee 
5.8 Kg 
270 
46980/ 



114480/ 
Maska 
25 Kg 
80 
60000/ 
Ghee 
5.8 Kg 
270 
46980/ 



106980/ 
Paneer 
18 Kg 
180 
97200/ 
Ghee 
2 Kg 
270 
16200/ 



113400/ 
Mava 
23 Kg 
150 
103500/ 
Ghee 
2 Kg 
270 
15600/ 



119700/ 
Peda/Burfi 
25 kg 
170 
127500/ 
Gulab Jamun 
45 Kg 
100 
135000/ 
Shrikhand 
50 kg 
85 
127500/ 
Ghee 
3 Kg 
270 
24300/ 



151800/ 
D. Probable Profit from Different product mix manufacturing possibilities per month
Table 31.5 Probable Profit from Different product mix manufacturing possibilities
Product Combination Number 
Sale per month, Rs 
Production cost per month, Rs 
Net profit per month, Rs***** 
01 
1,06,650 
81000 
25650 
02 
114480 
81000 
33480 
03 
106980 
81000 
25980 
04 
113400 
81000 
32400 
05 
119700 
86000* 
33700 
06 
127500 
91000** 
36500 
07 
135000 
96000*** 
39000 
08 
151800 
107000**** 
44800 
 Includes cost of sugar.
 Includes fuel cost and cost of sugar. Fuel cost increases due to heat desiccation and frying. (Rs 5000 as fuel cost and Rs 5000 as cost of sugar for 6 Kg sugar to be added)
 Includes fuel cost and cost of sugar. Fuel cost increases due to heat desiccation and frying. (Rs 5000 as fuel cost and Rs 10000 as cost of sugar for 12 Kg sugar to be added)
 Shrikhand preparation cost includes cost of sugar and flavouring agents.
 Net profit mentioned is for 100 liters of milk handled per day at initial level capacity. However there is full scope to increase the production capacity.
To evaluate the financial feasibility of the given project the following important points have been considered
* Calculation of Cost of Production.
* Calculation of Gross and Net working capital
* Statement of annual Income & expenditure and net surplus.
* Cash flow for the entire life of the project & checking the financial feasibility of the project using most popular criteria such as  NPV (Net present Value), IRR (Internal Rate of Return), Payback Period & Benefit cost ratio.
Refer to the data given in Table No.31.2
The total investment outlay of the project will be Rs. 1, 50,000. Out of which ,
Plant & machinery, equipment cost = Rs. 1, 25,000
& Investment in Net working capital = Rs. 25,000
Plant & Machinery shall be depreciated by using the straightline method. Assuming the scrap value of Plant & machinery at the end of 5 years as 12,500, the annual depreciation comes to
5 years = Rs. 22,500 p.a
Rs. 1,20,000 = Bank loan with rate of interest 14% p.a for 5 years
Interest = 14% × 1,20,000 × 5 years
Total amount to be repaid in 5 years = Rs, 2,04,000 /
(EMI) Equated Monthly Installment = Rs. 2,04,000
12 × 5
= Rs. 3400 /
Annual Installment = Rs. 3400 × 12
= Rs. 40,800 /
II. Calculation of cost of production.
The cost of production has been calculated as the cost of processing/manufacturing products from 100 liters of milk per day. Refer to the data given in Table No.31.3
Table 31. 6
Manufacturing cost for 100 liters Milk per day. 

a) 
Cost of material Milk 100 kg. 6% fat Cost of fat @ Rs 350 /kg fat 
Rs. 2100 per day 
b) 
Cost of labour Monthly salary for two workers is Rs. 5000 
Rs. 166.66 per day 
c) 
Fuel consumption charges Range Rs. 5000 – Rs. 10,000 p.m Considering upper limit Rs. 10,000 p.m 
Rs. 333.33 per day 
d) 
Electricity charges Rs. 2000 p.m 
Rs. 66.66 per day 
e) 
Rent Rs. 2000 p.m 
Rs. 66.66 per day 
f) 
Miscellaneous Rs. 4000 p.m expenses 
Rs. 133.33 per day 

Total cost Total cost incurred in processing / manufacturing products from 100 Kg of milk per day 
Rs. 2866.00 per day 
Gross working capital is defined as the Total of current Assets and Net working capital is defined as current assets (CA) minus current liabilities (CL),
 No short term interest bearing loans or a cash credit facility from a bank has been availed.
 The Net working capital (CA  CL), represents the amount of working capital to be supported by the long term funds. The investment in net working capital has been made in the initial outlay (capital cost) of the project itself.
Table 31. 7
A 
Current Assets 

a) 
Inventory · Stock of milk for 1 day · Workinprocess for 1 day · Finished goods stock held for 3 days Total inventory 
Rs. 2100 Rs. 2866 Rs. 2866 × 3 Rs.13,564 
b) 
Debtors · Debtor collection period 1 day (i.e credit extended to customers is one day ) 
Rs. 2866 
c) 
Cash Balance · Assumed amount 
Rs. 18570 

Total Current Assets 
Rs. 35000 
B 
Current liabilities 


· Deferred wages – one month 
Rs. 5000 

· Deferred Rent – one month 
Rs. 2000 

· Deferred Electricity charges – one month 
Rs. 2000 

· Deferred payment of miscellaneous expenses– one month 
Rs. 1000 

Total current liabilities 
Rs. 10,000 

NET WORKING CAPITAL (To be supported by long term funds) Current assets – current liabilities=(A  B) 
Rs. (35,000 – 10,000) Rs. 25,000 
Note on working capital
The level of Gross working capital (Current Assets) is affected by several factors such as seasonal fluctuations, demand of products, certainty in supply of milk, quality of debtors, availability of credit from the supplier etc. Hence, the working capital level changes throughout the life of the project. A prudent entrepreneur should try to minimize his investment in working capital, but at same time ensure that there are no production stoppages due to lack of materials, there is no loss of business due to non granting of credit to customers etc. In case of large cash balances lying idle in bank, such amounts should be invested in short term bank fixed deposits or any other suitable short term financial security.
IV. Statement of annual income & expenditure and net surplus.
Table 31. 8

Calculation of Income & expenditure : 

A. 
Annual Income from Sales Revenue. The sales revenue has been taken as the average of the 8 options given in table no. 5 
Rs. 1,21,938 × 12 Rs. 14,63,256 
B. 
Annual Cost of Processing /Manufacturing products from 100 liters of Milk per day. This cost has been taken as an average of the 8 options given in table no.5 
Rs. 88,000 × 12 Rs. 10,56,000 
C 
Gross Profit (Before Depreciation, Interest & tax) = A – B 
Rs. 4,07,256 

Less : Annual Depreciation of Plant & machinery 
Rs. 22,500 
D 
Operating Profit (Profit before Interest & Tax) 
Rs. 3,84,756 
E 
Appropriations from the Profit 

F 
Profit 
Rs. 3,84,756 
G 
Annual cash outflow due to Repayment of Loan (principal & Interest) 
Rs. 40,800 
H 
Net Surplus with the owner (before tax)= FG 
Rs. 3,43,956 
Note:
2. The Net surplus before tax has been given because the Net profit after tax depends upon the tax slabs and tax planning of individual owners.
V Cash flow for the entire life of the project & checking the financial feasibility of the project.
Calculation of cash flows and Project profitability
Particulars/ Year 
0 
1 
2 
3 
4 
5 
Capital equipment 
125,000 
 
 
 
 
 
Net working capital 
25,000 
 
 
 
 
 
Sales Revenues (Average of all 8 option given in table No5 .) 
 
1,463,265 
1,463,265 
1,463,265 
1,463,265 
1,463,265 
Cost (Average of all 8 option Given in table No 5.) 
 
1,056,000 
1,056,000 
1,056,000 
1,056,000 
1,056,000 
Depreciation 
 
22,500 
22,500 
22,500 
22,500 
22,500 
Profit before tax [345] 
 
384,765 
384,765 
384,765 
384,765 
384,765 
Assumed Tax rate @ 20% 
 
76,953 
76,953 
76,953 
76,953 
76,953 
Profit after tax (6 – 7) 
 
307,812 
307,812 
307,812 
307,812 
307,812 
Net salvage value of fixed assets 
 
 
 
 
 
12,500 
Net Recovery of working capital 
 
 
 
 
 
25,000 
Initial Outlay (Initial cash outflow) (1+ 2) 
150,000 
 
 
 
 
 
Operating cash flow (8+5) 
 
330,312 
330,312 
330,312 
330,312 
330,312 
Terminal cash flow (9+10) 
 
 
 
 
 
37,500 
Net cash flow 
150,000 
330,312 
330,312 
330,312 
330,312 
367,812 
The Net cash flows for the entire life of the given project can be summarized as follows
Table 31. 10

Year 
0 
1 
2 
3 
4 
5 
a 
Net cash flow 
150,000 
330,312 
330,312 
330,312 
330,312 
367,812 
b 
Discount factor @ 15% 
 
0.86956 
0.75614 
0.65751 
0.57175 
0.497177 
c 
Discounted cash flows (a*b) 
150,000 
287,228 
249,763 
217,186 
188,857 
182,868 
d 
Total Present Value of benefits =sum of discounted cash flows from year 1 to 5. 
1,125,901 





e 
Total investment in 0^{th} year 
150,000 






Net Present Value (d  e) 
975,901 
The project is acceptable since its NPV is positive. 
Calculation of NPV at higher discounting factors
Table 31.11
Discount factors 
Total PV 
Total 
NPV 
Benefit cost ratio= PV/investment 
15% 
1125901 
150000 
975901 
7.506008 
20% 
1002905 
150000 
852905 
6.686037 
30% 
814598 
150000 
664598 
5.430652 
50% 
578567 
150000 
428567 
3.85711 
From the above table it is clear that the IRR of the project ( i.e the discount factor for which the value of NPV becomes zero) is much higher than 50%.
31.4.1 Payback period
It is the time period in which the initial investment of the project is fully recovered. Clearly, by looking at the net cash flows it can be seen that the project has a payback period of less than one year.