Cover Feature

Break-even analysis of paper industry

In a scenario of globalization Indian paper industry has to leave with global cycle
while improving its own cost competitiveness. In this centext break even analysis
assumes a very important role - A real life case study

sions in excise duty particularly to

P
aper industry is considered to sign. In Coastal Andhra there are 11
be one of the core industries small-scale units. There are total 23 paper mills. Out of these, there is one
of A.P. The first paper mill in paper units in the State. Among these large-scale paper mill and 10 small-
the State was established at the Coastal Andhra region ranks first scale mills on the basis of size.
Rajahmundry, East Godavari district, with 11 units followed by Telangana Among the 11 paper mills, 5 units
in the year 1924. It was incorporated with 10 units and Rayalaseema with have been chosen on stratified ran-
in 1964 as the first Joint Sector En- 2 units. dom sampling technique. These units
terprise in Indian Paper Industry. The Sample Design are renamed as A, B, C, D & E in
mill became a three dimensioned order to maintain the secrecy of the
The sampling has been adopted
company equal participation among business. On an average, the study
covering the units on the basis of
the Government, the Public and the covers 62.5 per cent of the total units.
size, area and raw material aspects
West Coast Paper Mill Ltd. The State On geographical lines, the units are
in the research area, Coastal Andhra.
also classified as urban and rural. On
has 5 large-scale and 18 small-scale Table 1 indicates the sample de- this principle, there is one unit in
paper units at the end of the year
2000. Table 1: Sample Design of Paper Mills in Coastal Andhra
Andhra Pradesh occupies sixth
S.No Basis Category Total Sample %age of the sample
position in the production of paper
Units Units
and paperboard in India. It ranks 5th
position in the case of number of 1. Size large-scale 1 1 100
mills and 6th rank in terms of the in- Small-scale 10 4 25
stalled capacity of paper production 11 5 125/2=62.5
in the country. The reason for the 2. Area Urban, 1 1 100
establishment of number of units may
Rural 10 4 25
be attributed to the encouragement
11 5 125/2=62.5
of the Government by giving conces-
3. Raw Wood-based 1 1 100
Material Agro-based 10 4 25
W Principal & Director of Sri Sai Madhavi &Waste paper-based 11 5 125/2=62.5
Institute of Engineering and Technology
(SSMIET), Mallampudi-533294.
Source: Field Survey.
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urban area and 10 units in rural area. The data communicates that the variations in the components of cost.
Out of these one unit in urban area large mill ‘A’ is the old mill whereas Cost sheets for a period of 7 years
and 4 units in rural area are included the small mills are of recent origin. have been considered to eliminate
in the study on stratified sampling During the last seven years between fluctuations. Table 3 furnishes the
technique. 1994 and 2000, the capital apprecia- cost structure data relating to unit
Further, on the basis of raw mate- tion is double in large mill whereas ‘A’. It is observed from the table that
rials, the units are categorized as wood- it is slow in small mills. The same the material cost constitutes 31.9 per
based and agro-residue and recycled trend is viewed with regard sales cent of the total cost while conver-
waste paper based small-scale mills. also. The sales have increased from sion expenses 59.4 per cent. In ab-
Among the total 11 units, 1 wood- Rs 14154 lakhs in 1994 to Rs 27021 solute terms, the material cost on an
based unit and 4 agro residue and re- lakhs in 2000 in unit ‘A’ while in average was at Rs. 6004 lakhs where
cycled waste paper based units have small mills the growth rate is less. as conversion expenses about Rs.
been drawn on stratified sampling ba- However, unit ‘B’ improved substan- 11279 lakhs. Hardwood is the major
sis. This study is based on wood, agro tially from Rs 2848 lakhs to 6705 component of material cost followed
residue, and waste paper units and also lakhs as it turned into a large mill in by chemicals. The cost of hardwood
represented rural and urban regions in 1999. The profitability of small mills increased from Rs.2124 lakhs in
the Coastal Andhra Pradesh. Thus the is depressing while the large mill did 1993-94 to Rs.3724 lakhs in 1999-
inclusion of all types and regions in the better with 7-fold increase. 2000 registering an increase of more
sample coverage is quite satisfactory than one and half times. Among the
Cost Analysis:
for the purpose of analysis of this re- conversion expenses, power and fuel
Cost analysis is a significant tool eroded a lion’s share where admin-
search paper. In this context, ‘The
in cost management. Cost ascertain- istrative and manufacturing expenses
Circar Paper Mill’ a small-scale agro-
ment is done by means of a cost occupied a sizeable amount. On the
residue based unit of Nellore District
sheet. The data incorporated in cost other hand, selling and distribution
is excluded from the sample study as
sheet is collected from various state- expenses showed an increasing trend
it has become a sick unit and was
ments of accounts that are written in rising from Rs. 75 lakhs in1993-94
closed in 1996. Thus, the paper units
company accounts regularly. Analy- to Rs. 554 lakhs in 1999-2000 Inter-
of the Coastal Andhra, the present re-
sis of cost is necessary for compari- est component shares a little amount.
search area of sample design specified
son over the years for cost control
in the Table 1 covered 62.5 per cent. In case of wages and salaries,
and cost planning. Table 3 depicts the
there was a sharp rise till 1997-98
Basic Data of Sample Mills: cost sheet of Unit ‘A’ from 1993-94
and thereafter showed a downtrend.
To have a comprehensive study of to 1999-2000.
Introduction of automation resulted
the sample mills the preliminary de- Cost Analysis in Sample Mills: in the reduction of staff costs. Being
tails would provide an understanding large-scale company in the industry,
The purpose of cost analysis is
of their structure and progress. These the unit ‘A’ has set up a costing de-
to have a clear perception of the
details are depicted in Table 2. partment to monitor the cost. This
department is vested with the respon-
Table 2: Basic Details of Sample Paper Mills from 1994 to 2000 sibility of minimizing costs at every
Units Location Year Installed capacity Capital Sales Turnover Net profit stage of production and suggesting
A.P. Of Tones (&Yr 1994 Rs. Lakhs Rs. Lakhs Rs. Lakhs cost saving techniques. Consequent
District establ- to 2K) & (Yr 1994 (Yr 1994 (Yr 1994 upon this measure, the firm has been
wise ishment to 2K) to 2K) to 2K) able to control costs wherever pos-
Yr1994 2K 1994 2K 1994 2K 1994 2K sible.
A E.G. Dist. 1964 92500 98500 563 1125 14154 27021 652 4788 Break - even Analysis:
B E.G.Dist. 1974 18000 55000 75 1090 2848 6705 202 1640 The term “Break-even Analysis”
C W.G. Dist. 1975 9000 18000 300 331 4213 5554 29 75 refers to a system of determination
of the level of activity where total
D E.G.Dist. 1975 5750 6000 90 72 936 1655 90 56
cost equals the total selling price. It
E Srikakulam implies the system of analysis that
Dist. 1978 12000 16500 90 172 1607 1699 235 75 determines the probable profit at any
Source: Field Survey. level of output. The relationship be-
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Table 3: Cost Sheets of unit ‘A’ from 1993-94 to 99-2000 and average based on 7-year data. tween cost of production, volume of
PARTICULARS 1993- 1994- 1995- 1996- 1997- 1998- 99- AVG. output, quantum of profit and sales
94 95 96 97 98 99 2000 value is established by break-even
analysis. This analysis is also known
Installed capacity 92500 92500 92500 98500 98500 98500 98500 95928.6
as cost -volume-profit (CVP) analy-
Production — tones 79465 83313 83251 79861 84330 91543 94334 85156.7 sis. It is an important medium
Capacity through which one can have an in-
Utilization (%) 86 90 90 81 86 93 96 88.9 sight into effects of profitability due
(A) Material cost to variations in cost and sales. It en-
ables the entrepreneur to take effec-
Bamboo 789 713 940 946 1079 965 964 913.7
tive decisions. BEP refers to that
Hard wood 2124 2605 2726 2995 3020 3883 3724 3011.0 level of activity where income of the
Waster paper cuttings 180 305 443 341 264 293 404 318.6 business exactly equals the expendi-
Cost of chemicals 1393 1640 1874 1953 2009 1897 1978 1820.6 ture. In other words, it is a “no profit-
no loss point”. If production is in-
Total Cost of creased beyond this level, profit shall
material(A) 4486 5263 5983 6235 6372 1038 1010 6063.9
accrue and if decreased below this
Conversion Expenses level, loss shall be suffered.
Power &. Fuel 2545 2562 2614 3267 3680 4096 3736 3214.3 Break-Even Analysis of Unit ‘A’:
Wages & Salaries 2140 2306 2408 2387 2982 3033 3230 2640.9 Break-even analysis of ‘A’ is
Repairs & made after considering the fixed and
Maintenance 233 315 453 383 315 353 465 359.6 variable expenses. On the basis of a
R & D expenses 26 27 26 30 22 30 26 26.7 7-year period, average expenses are
computed to arrive at the contribu-
Depreciation 326 415 543 781 821 838 894 659.7
tion and profit. The data relating to
Adm. Overheads 3137 3416 4652 5451 4653 4463 4872 4377.7 break-even has been presented in
Conversion on Table 4.
cost (B) 8407 9041 10696 12299 12473 12813 13223 11278.9 According to the table 4 it is evi-
Total Conversion dent that the company’s required pro-
cost (A+B) 12893 14304 16679 18534 18845 19851 20293 17342.7 duction “no profit no loss point” is
Add Opening Stock 55038 tones and sales amount comes
of W.I.P 31 53 27 50 79 55 55 50.0 to Rs. 14964 lakhs. This company is
in a comfortable position having pro-
TOTAL 12924 14357 16706 18584 18924 19906 20348 17392.7
duced 85157 tones on an average
Less Closing worth Rs. 23138 lakhs sales and
Stock of W.I.P 53 27 50 79 55 55 105 60.6 maintains a safety margin of Rs. 8174
Cost of lakhs. Immense opportunities are
Production (C) 12871 14330 16656 18505 18869 19851 20243 17332.1 available to the company to take up
Add Op. Stock expansion programme in the face of
of fin. Goods 429 547 323 394 900 991 629 601.9 profitable area.
TOTAL 13300 14877 16979 18899 19769 20842 20872 17934.0 Cost Analysis of ‘B’
Less CI. Stock of The cost sheets of unit ‘8’ for a
fin goods 547 323 394 900 991 629 309 584.7 seven-year period from 1993-94 to
Cost of Sales (D) 12753 14554 16585 17999 18778 20213 20563 17349.3 1999-2000 are shown in Table 5. A
perusal of the table brings forth sev-
Selling &. Dist. expense 75 224 286 307 386 551 543 338.9
eral interesting points. The raw ma-
Interest 556 678 722 798 831 850 886 760.1 terials consumed in the mill include
Total Cost (E) 13384 15456 17593 19104 19995 21614 21992 18448.3 rice straw, jute waste, waste paper,
Source: Compiled from Annual Reports of ‘P’. and wood pulp. Another significant
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Table 4: Break-even analysis based on the average of seven years Form static, the interest charges had in-
1994 to 2000 creased thrice from Rs. 63 lakhs in
(Rs. In Lakhs) 1993-94 to an abnormal level of
FIXED COST Amount Rs.1579 lakhs in 1999-2000. The
causes of increase can be traced to
1) Wages & Salaries 2640.86
large-scale borrowing for expansion
2) Repairs and Maintenance 359.57 programme.
3) Administrative expenses 4377.71 Break-even Analysis:
4) Depreciation 659.71 In order to analyze the costs of
5) Interest 760.14 BEP the breakeven technique is
adopted. The data relating to cost
TOTAL FIXED COST (A) 8798.00 volume and profit of unit ‘B’ are de-
VARIABLE COST picted in table 6. As per the table it
1) Material Cost 6063.86 is evident that the average sales
value, variable cost, and fixed cost
2) Power & Fuel 3214.29 of unit ‘B’ are put at Rs. 3704 lakhs,
3) Selling & Distribution expenses 338.86 2943 lakhs and Rs. 857 lakhs respec-
TOTAL VARIABLE COST (B) 9617.00 tively.
After applying the formula it is
BREAK-EVEN ANALYSIS
found that the production of products
SALES 23138.00 of unit ‘B’ at break even level should
Less Variable Cost 9617.00 be at 24877 tones whereas the actual
production is only 22091 tones.
CONTRIBUTION 13521.00
Similarly, when there should be sales
Less Fixed Cost 8798.00 value of Rs. 4180.48 lakhs, actual
PROFIT 4723.00 sales of the company are at Rs.
3704s. Thus there is a deficit of sales
B.E.P. QUANTITY = FIXED COST / CONTRIBUTE PER UNIT
activity. As such there is no margin
TOTAL No. OF UNITS = 85157.00 of safety as the concern is in losses.
CONTRIBUTION PER UNIT 15877.73 Chart analysis of unit ‘B’:
B.E.P. UNITS = 55411 In unit ‘B’ the fixed costs have
2) B.E.P. IN AMOUNT = FIXED COST /PV RATIO been incurred at Rs. 857 lakhs and
variable cost at Rs. 2943 lakhs. The
PV RATIO = CONTRIBUTION /ALES
sales turnover came to about Rs.
PV RATIO = 58.44 3704 lakhs and the average out put
B.E.P. IN AMOUNT (in lakhs)= 873800000/58.4% 15055.70 has been around 22091 tones. Bas-
ing on this data the BEP chart has
MARGIN OF SAFETY: been drawn in chart 2. As per the
Actual Sales — BEP Sales Rs. (23138-14964)lakhs 8174 chart the BEP out put is computed at
24877 tones and sales turnover at Rs.
4180.48 lakhs. But the actual produc-
tion has been less than BEP quantity.
ingredient is chemicals and stores. bution expenses account for the re-
Thus there is no margin of safety.
Among all, the major raw material is maining share.
jute waste, which costs high. On the Among the conversion expenses, Cost Analysis of unit ‘C’:
whole, the material cost comes to the cost of power and fuel forms the Unit ‘c’ mill’s cost sheet is por-
58.9 per cent, while the conversion major component followed by wages trayed in Table 7 in which the mate-
on cost contributes to 39.3 per cent. and salary. While the selling and dis- rial cost, conversion cost, and total
Finance expenses, selling and distri- tribution cost remained more or less cost are shown.
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Table 5: Cost Sheets of unit ‘B’ from 1993-94 to 99-2000 and the aver- It is appalling to note that the
age based on a - 7-year data material cost on an average consti-
PARTICULARS 1993- 1994- 1995- 1996- 1997- 1998- 99- AVG. tuted 44.8 per cent of the total cost.
94 95 96 97 98 99 2000 The material cost has shown fluctua-
Installed capacity 18000 18000 18000 18000 18000 18000 55000 23280 tions between 2003 lakhs and 2438
lakhs. During the year 1998-99, it re-
Production — tones 20028 20017 20482 19607 17440 18533 38533 22091
corded lowest cost at Rs. 1798 lakhs.
Capacity Utilization (%) 111 111 114 109 97 103 70 102 On the other hand, conversion ex-
(A) Material cost penses over this period contributed
Rice straw 103 76 118 114 135 144 140 119 to 55.2 per cent on the average. It
Gunny Waste 372 400 470 476 335 359 377 398 was highest in 1999-2000 recording
Rs. 2363 lakhs. The conversion cost
Waster paper 182 282 85 40 31 28 2439 441
has been continuously increasing
Wood pulp 195 84 315 234 164 123 151 181 during the study period. The cost of
Misc. Materials 43 80 90 14 153 106 8 85 fuel and power has been the major
Cost of Chemicals 704 769 989 795 675 656 1287 839 component of cost among conversion
Total Material cost (A) 1599 1671 2067 1773 1493 1416 4402 2060 expresses to 122 lakhs in 1999-2000.
(59.8) (58.4) (61.7) (56.3) (51.3) (44.8) (55.3) (58.9) This unit consumes gas in power
(B) Conversion Expenses generation. It is supplied by ONGC
through pipelines and available at
Power & Fuel 631 658 754 836 852 851 1431 859
cheaper rates. So cost of power is at
Wages & Salaries 135 151 181 209 195 221 352 206
controllable level. It is interesting to
Repairs & Maintenance. 82 81 66 57 53 53 96 70 note that despite decrease in produc-
Depreciation 35 38 46 53 48 56 401 97 tion volume, there have been up-
Adm. Overheads 87 99 163 128 97 104 321 143 trends in cost of production. The
Conversion on cost (B) 970 1027 1210 1283 1245 1285 2601 1375 causes are traced to hike in wages
(36.3) (35.9) (36.1) (40.7) (42.8) (40.7) (31.4) (39.3) and salaries and in effective moni-
Total Conversion cost 2569 2765 3287 3076 2795 2764 7003 3435 toring of costs.
(A+B) Break-even Analysis of ‘C’:
Add Opening Stock of 20 20 10 20 57 63 28 31 The data pertaining to break-
W.I.P even of unit ‘c’ is provided in Table
TOTAL 2589 2785 3297 3096 2852 2827 7031 3466 8, a 7-year data has been considered
Less Closing Stock for the purpose of analysis and to
of W.I.P. 27 10 20 57 63 18 122 45 eliminate fluctuation, an average is
Cost of Production (C) 2562 2715 3267 3019 2732 2740 6909 3421 computed. The contribution of the
Add Op. Stock of fin. 55 34 18 23 137 247 152 148 enterprise is put at Rs.1305 lakhs,
goods while the fixed cost were at 1002
TOTAL 2617 2809 3295 3062 2926 3056 7061 3273 lakhs and variable costs Rs. 3308
Less CL Stock lakhs. After the application of the
of fin goods 34 18 23 137 247 152 368 140 formula, the BEP units came to
15905 tones while BEP sales value
Cost of Sales (D) 2583 2791 3272 2925 2679 2904 6693 3133
to Rs, 3540 lakhs. The company has
Selling & Distribution 25 22 21 18 20 37 22 24
the safety margin for production is
Exps.
calculated at 4808 tones and the sales
Interest 63 50 58 207 210 218 1579 341
value of Rs. 1073 lakhs. As per the
Total Cost (E) 2671 283 3351 3150 2909 3159 8294 3498 analysis, the unit can take up expan-
(100) (100) (100) (100) (100) (100) (100) (100) sion programme in the face of large
Source: Compiled from Annual Reports of ‘B’. margin of safety.
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Table 6: Statement of Break- even Analysis of unit ‘B Analysis of unit ‘C’ BEP Chart:
PARTICULARS AMOUNT IN On the basis of cost and sales
FIXED COST RS. LAKHS data, the BEP chart relating to unit
1) Wages & Salaries 206 ‘C’ has been incorporated in Chart
3. Basing on the data, the BEP quan-
2) Repairs and Maintenance 70
tity has been arrived at 15905 tones
3) Administrative expenses 143 and sales value at Rs. 3540 lakhs.
4) Depreciation 97 This unit is producing above the BEP
5) Interest 341 quantity and maintaining the sales
TOTAL FIXED COST (A) 857 value as well. The safety margin is
VARIABLE COST to the tune of Rs. 1073 lakhs. In view
1) Material Cost 2060 of the encouraging result, this unit
can be take-up for expansion pro-
2) Power & Fuel 859
gramme.
3) Selling & Distribution expenses 24
TOTAL VARIABLE COST (B) 2943 Cost Analysis of ‘D’:
BREAK-EVEN ANALYSIS Cost sheet describes various
components of cost at different
SALES 3704
stages. Cost control and cost effi-
Less Variable cost 2943 ciency are achieved only through the
CONTRIBUTION 761 cost statement. The cost sheets of
Less Fixed cost 857 unit ‘D’ over a period of 7 years
LOSS -96 from1993-94 to 1999-2000 has been
B.E.P QUANTITY = FIXED COST/CONTRIBUTE PER UNIT 857/3445 presented in table 9.
TOTAL No OF UNITS = 22091 On an analysis of the table it is
CONTRIBUTION PER UNIT 3445 apparent that the average total cost
was computed at Rs. 1083 lakhs of
B.E.P UNITS = 24877
which material cost alone contrib-
2) B.E.P IN AMOUNT = FIXED COST/ PV RATIO 857/20.5% uted to Rs. 556 lakhs constituting
PV RATIO = CONTRIBUTION /SALES 761/3704X100= 50.9 per cent on an average. The ex-
20.5% penses incurred towards conversion
PV RATIO = 20.5% of raw materials into finished prod-
B.E.P IN AMOUNT (in lakhs)= 857/20.5% 4180.48 ucts came to about Rs. 480 lakhs reg-
Source: Cost Sheet of unit ‘B’; istering 43.7 per cent.
Chart 1 : Break - even Chart of Unit ‘A’ Among the conversion expenses
power and fuel constitute the signifi-
cant item of cost covering nearly
three-fourths of conversion cost. The
interest burden contributed to Rs. 32
lakhs forming 3.2 per cent of the to-
tal cost.
On an examination of the data it
is observed that the material cost has
shown an increasing trend from Rs,
405 lakhs in 1993-94 to Rs. 607 lakhs
in 1997-98 but thereafter there has a
decreasing trend to Rs. 558 in 1999-
2000. In case of conversion cost
there was a continuous rise through-
out the study period except in the
 Cover Feature

Table 7: Cost Sheets Of Unit ‘c’ from 1993-94 to- 99-2000 and the aver- year 1998-99. The causes for the
age based on a - 7-year data (In Rs. Lakhs) downward trend has been attributed
PARTICULARS 1993- 1994- 1995- 1996- 1997- 1998- 99- AVG. to reduction in production of paper
94 95 96 97 98 99 2000 due to heavy piling of stocks and
pressure from recessionary trends in
Installed capacity 18000 18000 18000 18000 18000 18000 18000 18000
the market.
Production - tones 22826 21900 21648 17842 18993 19143 22649 20713
Computation of break-even point
Capacity Utilization (%) 126.8 121.6 120.2 99.1 105.5 106.3 125.8 115 entails a company to knowwhere it
(A) Material cost stands at any level of output. Differ-
Rice straw 205 189 162 141 159 146 173 168 ent aspects of break-even of ‘D’ are
portrayed in Table 10. Break-even of
Gunny Waste 77 77 142 79 100 93 90 94
‘D’ is computed on the basis of av-
Waster paper 381 501 779 607 420 415 615 531 erage values for a seven-year period
Wood pulp 38 3 18 82 104 74 41 51 from 1993-94 to 1999-2000. It is ar-
Misc. Materials 6 - - 13 32 18 - 17 rived at after taking average sales
value at Rs. 1314 lakhs, variable cost
Cost of Chemicals 958 911 1103 1074 918 884 1009 980
Rs. 904 lakhs, and fixed cost at Rs.
Total Material Cost (A) 1665 1681 2204 1996 1733 1630 1928 1841 188 lakhs. After application of the
(42.5) (44.9) (50.9) (52.3) (41.1) (44.6) (38.1) (44.8) formula, the contribution of the firm
(B) Conversion Expenses is reckoned as Rs 410 lakhs and
Power & Fuel 820 831 883 896 1032 1042 1224 961 profit Rs. 222 lakhs. During the study
period, the average production vol-
Wages & Salaries 239 246 309 338 322 343 368 309
ume was found to be 6576 tones. On
Repairs & Maintenance. 130 129 163 153 164 18 220 154 application of the principle, it is com-
Depreciation 110 113 117 125 130 131 68 113 puted that the break-even production
Manufacturing Expenses 101 123 124 104 102 91 145 113 is 3016 tones and the sales value is
about Rs. 602.56 lakhs. At these val-
Adm. Over heads 77 101 79 110 99 99 338 129
ues, there is a large safety margin to
Conversion on cost (B) 1477 1543 1675 1726 1849 1824 2363 1779 the firm at Rs. 711.44 lakhs of sales
(57.5) (55.1) (49.1) (47.7) (58.9) (55.4) (61.9) (55.2) value. In the ultimate analysis, it is
Total Conversion cost 3142 3224 3879 3724 3582 3454 4290 3620 deduced that the firm is in a comfort-
(A+B) able position in profitability enabling
Add Opening Stock of 101 51 67 133 135 140 111 105 it to take up further expansion pro-
W.I.P. grammes.
TOTAL 3242 3275 3946 3857 3717 3594 4401 3725 Analysis of BEP Chart of unit ‘D’:
Less Closing Stock of 38 46 117 135 140 111 92 97 This mill’s BEP chart is por-
W.I.P. trayed in Chart 4. The fixed cost of
Cost of Production (C) 3204 3229 3859 3722 3577 3483 4309 3628 the mill has been computed at Rs.
188 lakhs at variable cost at Rs. 904
Add Op. Stock of fin. 129 38 46 117 527 311 535 243
lakhs. Accordingly the BEP chart is
goods
drawn in which the production is
TOTAL 3333 3267 3875 3839 4104 3794 4844 3871 shown on an X-axis and sales and
Less CI. Stock of fin goods 51 67 133 527 311 535 73 242 costs are shown on Y-axis. The sales
Cost of Sales (D) 3282 3200 3742 3312 3799 3259 4771 3629 lie and the total cost line have inter-
sected at 3016 tones, at the point of
Selling & Distribution Exp. 186 228 229 147 160 154 165 181
no loss-no profit. At the same time
Interest 347 310 443 353 260 247 119 297 the BEP sales- value is arrived at Rs.
Total Cost (E) 3815 3738 4414 3812 4213 3660 5055 4107 602.56 lakhs. The company has a
Source: Compiled from Annual Reports of Unit ‘C’. comfortable safety margin of 3565
 Cover Feature

Table 8: Statement of Break- even Analysis of unit ‘C’ tones and sales turnover of Rs.
PARTICULARS AMOUNT IN 711.44 lakhs.
FIXED COST RS. LAKHS Cost Analysis of unit ‘E’:
1) Wages & Salaries 309 Financial analysis implies not
2) Repairs and Maintenance 154 only financial statement but cost
3) Admistrative expenses 129 analysis as well. A deep study of
costs at different stages will entail
4) Depreciation 113
understanding the cost behaviour
5) Interest 297 cost of unit- ‘E’ has been prepared.
TOTAL FIXED COST (A) 1002 A Cost sheet is depicted in Table- 11.
VARIABLE COST It discloses that the average capac-
1) Material Cost 2053 ity, production, and utilization lev-
2) Power & Fuel 961 els are 14570 tones, 13634 tones and
3) Selling & Distribution expenses 181 93.5% respectively. The average ma-
terial cost comes to 757 lakhs con-
4) Manufacturing Expenses 113
stituting 45 per cent where as the
TOTAL VARIABLE COST (B) 3308 conversion cost of Rs 825 lakhs
BREAK-EVEN ANALYSIS forming 49.5 per cent. The interest
SALES 4613 forms about Rs. 90 lakhs adding 4.5
Less Variable Cost 3308 per cent to the total cost. Though the
CONTRIBUTION 1305 material cost increased from Rs. 616
Less Fixed Cost 1002 lakhs to 845 lakhs during the last 7
years Its share has come down con-
Profit 303
siderably from 45.7 to 43.4 per cent
B.E.P. QUANTITY = FIXED COST/CONTRIBUTE PER UNIT 1002/6300 during this period. Similarly the con-
TOTAL No. OF UNITS = 20713 version expenses also showed an up
CONTRIBUTION PER UNIT 6300 trend rising from Rs. 655 lakhs 1993-
B.E.P. UNITS = 15905 94 to 971 lakhs in 1999-2000. But
2) B.E.P. IN AMOUNT = FIXED COST/ PV RATIO 1035/28.3% in contrast to material cost, its- stake
has increased from 48.8 per cent to
PV RATIO = CONTRIBUTION /SALES=1305/4613×100= 28.3%
51.2 per cent. The interest compo-
B.E.P. IN AMOUNT (in lakhs)= 857/20.5% 3540
nent was static at 4.5 per cent during
MARGIN OF SAFETY 1073 this period. It is evident from this
Actual Sales - BEP Sales =4613 – 3540= analysis that the overhead costs have
Source: Cost Sheet of unit ‘C’ lost control. Cost control measures
Chart 2 Break-even analysis of unit ‘B’ are to be mooted on overheads. Table
11 portrays the cost data.
Table 12 indicates unit of ‘E’
BEP analysis based on 7year aver-
age from 1993-94 to 1999-2000. The
company has incurred fixed cost of
Rs. 477 lakhs and variable costs of
Rs. 1666 lakhs with a production of
13634 tones on an average. Basing
on these details the BEP table 12 cal-
culation has been shown to compute
the production and sales at no profit
no loss basis. It shows that the sales
and the total cost line have inter-
 Cover Feature

Table 9: Cost sheets of ‘D’ from 1993-94 to 1999-2000 and the average sected at the point of Breakeven.
based on a 7-year data
Break even Analysis of unit ‘E’:
PARTICULARS 1993- 1994- 1995- 1996- 1997- 1998- 99- AVG. On the basis of data of sales,
94 95 96 97 98 99 2000 cost and production of unit ‘E’ the
Installed capacity (tones) 5750 6000 6000 6000 6000 6000 6000 6000 BEP is depicted in chart 5. The
Production - tones 5849 5935 7274 6508 6830 6575 7059 6576 chart shows that the break-even
Capacity Utilization (%) 101.7 98.9 121.2 108.4 113.8 109.5 117.6 109.6 production of this company has
been arrived at 12753 tones and
(A) Material cost
sales turnover of Rs. 1589 lakhs.
Rice straw 61 52 84 78 75 78 74 72 This mill has a small safety mar-
Gunny waste 46 58 94 140 126 117 113 99 gin of 851 tones of production and
Waster paper 23 39 34 35 21 15 16 26 Rs. 109 lakhs of sales turnover. In
the event of the small margin it is
Cotton linters 50 26 35 22 9 3 9 22
difficult for the mill to plan for
Misc. Materials 116 220 175 187 207 201 208 188 futures expansion programme.
Cost of Chemicals 109 109 184 178 169 157 138 149 The costs and break-even lev-
Total Material Cost (A) 405 504 606 640 607 571 558 556 els of the sample mills have been
(50.8) (54.0) (52.0) (53.8) (50.0) (50.3) (45.7) (50.9) thoroughly analyzed for every
(B) Conversion Expenses component at different stages.
Power & Fuel 220 240 320 349 388 377 405 328 Among the mills, ‘A’ and ‘C’ have
shown better performance while
Wages & Salaries 43 49 56 64 72 72 86 63
the working of ‘B’, ‘D’ and ‘E’ is
Repairs & Maintenance. 33 61 53 42 47 35 42 48 pathetic.
Depreciation 11 14 17 20 22 22 22 18 The paper industry is passing
Effluent Treatment 3 4 4 3 2 2 1 3 through difficult times. Obsolete
Adm. Overheads 20 6 52 25 19 8 32 20 machinery, outdated technology,
high cost of production, paucity of
Conversion on Cost (B) 330 374 502 503 550 516 588 480
(41.4) (40.2) (43.1) (42.3) (45.3) (45.5) (48.2) (43.7) funds, dwindling supply of forest
raw materials, non-availability of
Total Conversion Cost
skilled man power, recession in the
A+B) 735 878 1108 1143 1157 1087 1146 1036
market are some of the vital prob-
Add Opening Stock of
lems to focus attention. These
W.LP 3 2 3 3 4 13 14 6
problems have been studied in dif-
TOTAL 737 880 1111 1146 1161 1100 1160 1042 ferent perspectives and recommen-
Less Closing Stock of W.LP 2 3 3 4 13 14 8 7 dations are made. These problems
Cost of Production (C) 735 877 1108 1142 1148 1086 1152 1035 and suggestions, emanated from
Add Op. Stock the study, are briefed hereunder.
of fin. goods 54 47 6 32 181 177 292 113 Need for Renovation and
TOTAL 789 924 1114 1174 1329 1263 1444 1148 Moderanization :
Less CL Stock of fin goods 47 6 32 181 177 292 113 121 The industry suffers from ob-
Cost of Sales (D) 742 918 1082 993 1152 971 1331 1027 solete machinery and outdates
technology. As such the paper units
Selling &
are not in a position to compete
Distribution Exps. 27 27 36 18 1 0 8 20
with the units at global level in
Interest 35 25 20 28 54 46 65 36 terms of quality and cost. In order
Total Cost (E) 804 970 1138 1039 1207 1017 1403 1083 to overcome this problem the pa-
(100) (100) (100) (100) (100) (100) (100) (100) per mills need urgent renovation
Source: Compiled from Annual Reports of ’D’. and modernization of plant and
 Cover Feature

Table: 10: Statement of Break- Even Analysis of ‘D’ machinery to meet the require-
PARTICULARS AMOUNT IN ments of the global market.
FIXED COST RS. LAKHS Financing the Expansion Projects :
1) Wages & Salaries 63 In some of the mills ambitious
2) Repairs and Maintenance 48 expansion projects were taken up
3) Administrative Expenses 20 without proper financial planning.
4) Depreciation 18 Most of the projects were financed
by long-term loans. The cost of fi-
5) Interest 36
nance on these loans was very high
6) Effluent Treatment 03
when compared to its return. This
TOTAL FIXED COST (A) 188 created the financial chaos leading to
VARIABLE COST sickness of the mills. In case if it is
1) Material Cost 556 not possible to mobilize the equity
2) Power & Fuel 328 capital, it is suggested to limit such
3) Selling & Distribution expenses 20 programmes to the extent of inter-
TOTAL VARIABLE COST (B) 904 nally available funds. No new expan-
TOTAL COST (A+B) 1092 sion programmes should be financed
through debt capital only as it would
BREAK - EVEN ANALYSIS
endanger the already exiting finan-
SALES 1314
cial crisis.
Less Variable Cost 904
CONTRIBUTION 410 Establishment of a Mother Pulp
Unit :
Less Fixed Cost 188
Pulp making is a complex pro-
Profit 222
cess. Small paper mills are faced with
B.E.P. QUANTITY(In Tones) 188/6234=
an intricate problem with making
= FIXED COST/CONTRIBUTE PER UNIT 3016 pulp. If the pulp is available readily
B.E.P. QUANTITY(In Tones) 3016 they can concentrate on papermak-
TOTAL No. OF UNITS Produced = 6576 ing. It is necessary for the small mills
PV RATIO = CONTRIBUTION /sales=410/1314×100= 31.2% to relieve from this hardship.
B. E .P. IN AMOUNT = FC/PV RATIO In order to protect the small mills
B.E.P. IN AMOUNT (in lakhs)= 188/31.2% 602.56 from the dearth of raw materials and
MARGIN OF SAFETY: pulp, it is suggested that the govern-
Actual Sales - BEP Sales ment has to set up a mother pulp in-
Margin of safety Amount Rs. In lakhs:1314- 711.44 dustry in the state. This measure
602.56= would help to a large extent in re-
ducing congestion on raw material
Break-even Chart 3 of Unit ‘C’ and helps in smooth sailing of the
paper industry.
Alternative Energy Resource :
Paper industry is energy inten-
sive. Cost of energy has been on the
increase year by year. Cost reduction
is an urgent need of the industry. One
of the major elements of total cost is
the cost of energy. On an average it
contributes 20 to 25 per cent of the
total cost. Paper mills should intro-
duce energy efficient equipment pro-
 Cover Feature

Table: 11: Cost Sheets of ‘E’ from 1993-94 to 1999-2k and the average cesses and technology.
based on a - 7-year data As a measure of cost reduction
(Rs. Lakhs it is suggested that it should consume
PARTICULARS 1993- 1994- 1995- 1996- 1997- 1998- 99- AVG. alternative sources of energy. Abun-
94 95 96 97 98 99 2000 dant natural gas is available in the
coastal area of A.P. and the K.G
Installed capacity 12000 12000 12000 16500 16500 16500 16500 14570 project of ONGC has permitted the
natural gas for industrial use. Natu-
Tones ral gas is cheap and eco-friendly in
consumption. In this context it is de-
Production Tones 11850 12245 12811 14650 14973 14168 14745 13634
sirable to the paper mills to use the
Utilization % 98.7 102.0 106.7 88.7 90.7 85.8 89.3 93.5 natural gas for energy purposes as a
measure of cost reduction. This
(A) Material Cost would save the energy cost to a con-
siderable magnitude.
Waste Pacer 275 315 375 475 559 508 558 438
Research Development Facilities :
Straw 81 86 89 98 93 87 77 87
Research is an indispensable ac-
Gunny Waste 75 69 58 45 5 - - 50 tivity of the paper industry. It facili-
tates the viability of the industry in
Others 20 24 28 38 33 37 55 34 terms of quality and, cost and pro-
ductivity. Lack of research activity
Chemicals 165 172 160 165 138 139 155 148 endangers the paper mills in meet-
Total Material cost 616 666 710 821 828 771 845 757 ing the standards of paper. Many of
(45.7) (45.9) (45.6) (45.2) (45.2) (44.3) (43.4) (45) the sample mills are of small size and
cannot afford to employ in- house the
(B)ConversTon Cost research and development facilities
and equipment. Though there are re-
Power & Fuel 270 291 309 327 330 341 375 320 search laboratories in North India at
Wages & salaries 94 101 106 110 136 119 144 116 Sheranpur and Dehradun, they are
confined to that area only. South In-
Repairs & Maints. 15 17 16 20 26 29 20 20 dian Paper Mills suffer from lack of
R&D. facilities. It is found necessary
Manufacturing 96 102 115 133 137 128 112 118 a central research institute for pulp
Expenses. and papermaking should be set up at
Vijayawada or any centrally locate
Depreciation 45 50 54 67 68 70 72 61
place with necessary funds provided
Adm. ExDenses 135 143 161 234 214 194 253 190 by the government.

Total conversion 655 704 761 891 911 881 971 825 Conclusion :
The Indian paper industry will
on cost (B) (48.8) (48.6) (49.1) (49.21) (47.7) (51.7) (51.2) (49.5) have to learn to live with global
cycles while simultaneously improv-
Conversion Cost 1211 1310 1471 1712 1739 1652 1821 1576 ing its own cost competitiveness.
(A+B) Softening of local prices due to slug-
Interest & Finance 75 80 83 103 94 88 104 90 gish consumption growth, surge of
imports due to readjustment of tariff
Charaes (5.5) (5.5) (5.3) (5.6) (5.1) (5.0) %.4) (4.5) as a part of trade reforms for raw
materials, chemicals, power and fuel,
Total Cost 1346 1450 1554 1815 1833 1740 1925 1666 labor administration and finances on
(100) (100) (100) (100) (100) (100) (100) (100) the other, have squeezed the operat-
ing margins to a non-sustainable
Source : Annual Reports of unit ‘E” limit. It is a challenge to decide the
 Cover Feature

Table 12: B.E.P. Analysis of ‘E’ based on 7 years av- Chart 4 : BEP Chart of unit ‘D’
erage
PARTICULARS AMOUNT IN
1) FIXED COST RS. LAKHS
WAGES & SALARIES 116.00
REPAIRS & MAINTENANCE 20.00
ADMINISTRATION OVERHEADS 19.0.00
DEPRECIATION 61.00
INTEREST 90.00
TOTAL FIXED COSTS 477
Chart 5 : BEP Chart of unit ‘E’
2) VARIABLE COSTS
RAW MATERIALS 751.00
POWER II. FUEL 320.00
Manufacturing Expenses 118.00
TOTAL VARIABLE COST 1189
TOTAL COST 1666
BREAK-EVEN ANALYSIS
SALES 1699
Less VARIABLE COST 1189
CONTRIBUTION 510
Less FIXED COST 477 direction the paper industry should travel from the present
status. The concept of globalization where the industry
PROFIT 33 at present has not able to compete in price with the glo-
1) B.E.P. UNITS = FIXED Cost / bal market but also with quality and other specifications
CONTRIBUTION PER-UNIT of the product, making the decision more difficult. It is
true that liberalization has given the Indian entrepreneur
TOTAL No OF UNITS = 13634 an opportunity to step up industrial development and eco-
nomic growth for promoting globalization, but the trade
B.E.P. UNITS = 12753
reforms and other factors introduced resulted in the pace
2) B.E.P IN AMOUNT = FIXED with which the process of our socio-economic transfor-
COST/PVRATIO mation being overlooked. It seems, we have embarked
upon liberalization without realizing the major gap in
PV RATIO = CONTRIBUTION/SALES our policy making related to the desired infrastructure
PV RATIO = 30.02 development. It is now left to initiative and understand-
ing as to how the Government, Industry, and Trade As-
B.E.P. IN AMOUNT (in lakhs)= 1589.06 sociations work together to minimize the disadvantages
and maximize advantages under the new policy. A po-
Margin of Safety = Actual - BEP sales
litical and economical commitment is essential to develop
1699 - 1589.06 109.04
policies and long-term perspectives involving private and
public sectors that have to face the challenges boldly with
Source: Cost Sheet of ‘E’
strong determination and accountability. q