ECONOMICS OF DIFFERENT SCALES OF REARING AND COST BENEFIT RATIO

Transcription

1 UNIT 2 Structure ECONOMICS OF DIFFERENT SCALES OF REARING AND COST BENEFIT RATIO 2.0 Objectives 2.1 Introduction 2.2 Meaning of Cost 2.3 Classification of Costs 2.4 Relationship of Fixed and Variable Costs to Greater Profit or Smaller Loss on one hectare Mulberry Farm 2.5 Break-even Analysis 2.6 Cost of Cocoon Production 2.7 Economies of Scale 2.8 Let Us Sum Up 2.9 Glossary 2.10 Suggested Further Reading 2.11 References 2.12 Answers to Check Your Progress 2.0 OBJECTIVES After reading this unit, you will be able to: explain the meaning of cost and its classification; identify the costs which are appropriate for calculating economics of sericulture; discuss the concept of no loss no profit situation (break-even analysis) in business; and analyze the employment potential and income generation in sericulture. 2.1 INTRODUCTION In Block 1 and Block 2, you have learnt about the silkworm rearing practices, equipments required and the optimum environmental conditions required for successful cocoon crop production. In this unit, you will be learning about the information required for setting up commercial rearing unit. The total costs incurred in silkworm rearing are broken down into small meaningful categories and the same are hypothetically calculated for different size categories of farmers. Understanding different types of costs will help us to understand to what extent the costs are increasing annually in the firm and to what extent the output has to be increased so that the firm does not face financial losses. It is therefore necessary for an entrepreneur to have a working knowledge about basic cost concepts and patterns of cost behaviour. 17

2 Economics of Sericulture 2.2 MEANING OF COST Let us now make ourselves clear what is cost in the process of cocoon production. The amount incurred to procure or own a material or thing means Cost. It is generally refers to the outlay of funds for productive purposes. The costs of any productive period include the value of resource service transformed into the product within the specified time period rather than the value of resource itself. In the case of mono period resources such as seed, feed and fertilizer, the value of resource service, transformed into the product in any single period is identical to the value of resource itself. To understand this concept, have a look at the example given below: For example, if we have purchased 100 numbers of Disease Free Layings (dfls) for Rs.250, it can be said that the cost of 100 dfls is Rs.250. Similarly, if a reeler purchases one kg of cocoons by paying Rs.150, then, the cost of cocoons per kg is Rs.150. However, the term cost cannot be exactly defined. It may not be true in all circumstances and for all purposes. In a competitive market, as that of India s, prices cannot be controlled by an individual producer/farmer because there are large number of producers who are individually producing in small proportion of total production of a commodity. The additional production must, therefore, sell at the same or even lower prices. So, the alternative is to reduce the cost of production with low cost production factors. Since, cost minimization has to take place at individual level, degree of success directly adds to the profit of the producer. Do you know the meaning of cost of production? Come we shall discuss the same now. Cost of production means the expenses incurred to produce one unit of output. The items of costs that go into the cost of production are of different types and it will be in terms of fixed and variable costs. The expenses are always calculated in relation to a particular product and in a specific time period. The costs in any production period include the value of the factor-services transformed into product in a single period. The resources used in the production may be of the following two types: a) Poly-period Resources: To understand the meaning of poly period resource, consider the example of tractor services in the cultivation of mulberry. In this example, only a part of the tractor service is transformed into product in each production period. b) Mono-period Resources: Mono-period resources are represented by services such as fertilizers and silkworm seed. Here, the entire stock of services is transformed into product in a single period. So, in order to make correct choice from among alternatives, costs should be considered in relation to a specific time period. 2.3 CLASSIFICATION OF COSTS 18 It is important for us to know that the term cost of production is used same as that of expenses incurred in production. Whereas, in the subject matter of economics, cost means the total efforts, sacrifices, exertion involved in the production of a commodity and expenses of production i.e. money costs. So, we need to understand here that the cost of production involves both cash items as well as the non-cash items.

3 Cash Costs are incurred when resources are purchased and used immediately in the production process. For the most, cash costs result from purchases of nondurable inputs, which do not last more than one production period. Examples are fertilizer, fuel, oil and casual labour. Non-cash costs consist of depreciation and payments to the resources owned by the producer. Examples are depreciation on equipments and buildings, payment made to the producer himself, management and owned capital. Fixed Costs: Fixed costs are those costs, which are incurred at a time and the services could be utilized for a long period. Normally, these costs will not vary with the level of production on the farm. That means, these costs are to be incurred throughout the project. These expenses must be paid even if nothing is produced and they do not increase under bumper yields and high production. Fixed costs on a farm for a period of one year include: 1) Land revenue or land rent 2) Interest on investment for rearing equipments 3) Depreciation on rearing house, machinery etc. 4) Insurance premium (if any) on rearing house and equipments 5) Wages of labour hired on a permanent basis 6) Cost of family labour employed on the farm 7) Maintenance of farm machinery like tractors, tillers, deflossing machine etc. 8) Cost of mulberry cuttings 9) Investment on a well/bore well 10) Electrical installations Variable Costs: These costs are farming expenses, which are dependent on the level of production. This depends on the scale of production. They do not occur if nothing is produced on the farm. That means the amount of variable costs will be more to achieve higher level of production and less if lower level of production is anticipated. Variable costs on a typical farm include: 1) Cost of supplies such as fertilizer, water, labour, plant protection chemicals, disease-free layings, mulberry leaf (if purchased), electricity charges, marketing charges etc. 2) Labour hired occasionally. 3) Service costs of hired machines and other services. 4) Expenses incurred on repairs and replacement of building and equipment. 5) Interest on current investment. 6) Cost of disinfectant or chemicals. 7) Transportation cost. The total costs of production can be represented as: Total Production Costs = Total Fixed Costs + Total Variable Costs 19

4 Economics of Sericulture Check Your Progress 1 Note: a) Use the spaces given below for your answers. b) Check your answer with those given at the end of the unit. 1) List out the different cost items involved in mulberry cultivation and silkworm rearing. 2.4 RELATIONSHIP OF FIXED AND VARIABLE COSTS TO GREATER PROFIT OR SMALLER LOSS ON ONE HECTARE MULBERRY FARM The total costs are important for determining the net gain to a farm business during the production period. Net gain is determined by deducting total cost from gross returns. If gross returns are more than total costs, the entrepreneur should apply the principle of using more resources, if capital is available as long as the added returns are greater than the added costs. If returns are less than the total costs but greater than variable costs, the same principle should be used, namely adding to production as long as marginal or added returns are greater than the marginal or added costs. In the first case, we maximize profit, but in the second, we minimize loss. This is illustrated in the Table 2.1. Table 2.1: Relationship of Fixed and Variable Costs to Greater Profit or Smaller Loss on One Hectare Mulberry Farm (Hypothetical Figures) Item Fixed Costs Amount of Costs & Returns (Rs.) with No Fertilizer 20kg N/ha 40 kg N/ha Land revenue Depreciation & repairs on buildings & equipment Interest on investment in buildings & equipment Maintenance of rearing equipment Wages of permanent labour Total

5 Variable Costs Hired labour Silkworm seed cost Fertilizers Chemicals Water charges Miscellaneous Total Total costs Cocoon production (kg) Gross returns (@Rs.150 /kg) Added Cost Added Returns BREAK-EVEN ANALYSIS This refers to the determination of the level of resources where there will be no profit or no loss. If production is increased beyond this level, profit shall accrue to the business and if it is decreased, loss shall be suffered. That means, it estimates the minimum level of production for not incurring loss in the farm business. This analysis is also called as Cost-Volume-Profit Analysis. This analysis is useful for an entrepreneur in the following ways. It helps him to decide how much to produce at a given price for not incurring loss. It helps to alter the level of production and level of input use. Thus, Break-even analysis is an important technique through which one can know the level of profit due to variations in costs and sales. Graphically, the Break even point could be shown as indicated in the Figure 2.1: Break-even Point Profit Total Income Rs. Lakhs Losses Total Costs Fixed Costs Fig. 2.1: Physical units of production (No.) 21

6 Economics of Sericulture Check Your Progress 2 Note: a) Use the spaces given below for your answers. b) Check your answer with those given at the end of the unit. 1) Write the concept of break-even point. 2.6 COST OF COCOON PRODUCTION In economic analysis of agriculture enterprises, a comparison of costs with returns is done mainly to determine which enterprise is more remunerative. Thus, the identification and calculation of costs and returns is important. While computing the cost of production for individual enterprises in farming, the costs are categorized into two groups: 1) Fixed/non-recurring and 2) Variable/recurring costs The total cost comprises both variable and fixed costs. The distinction between fixed and variable costs is very important from the standpoint of decision-making. Suppose, there is an individual venturing into farming afresh, all these costs are to be considered to evaluate the feasibility of investment. In case of a farmer who already own the infrastructure, but wants to decide upon the type of enterprise to be chosen, then variable costs could be sufficient to decide upon the profitability of different enterprises. The cost of cultivation for one hectare of mulberry cultivation with V1 variety in paired row system of plantation with the spacing of (150 cm + 90 cm) X 60 cm and silkworm rearing in shoot rearing method with bivoltine silkworm hybrids is given in Table 2.2 and 2.3. Table 2.2: Economics and Employment Generation in Cocoon Production Sl. Particulars Value (Rs) Employment No. Created (Man-days) 1) Establishment cost of mulberry 39, garden (I year) 2) Maintenance cost of mulberry (I year) 69, ) Maintenance cost of mulberry (II year) 81, ) Rearing building and equipments 1,00,000 (to rear 800 dfls at a time) 5) Rearing expenditure/year 76, In the total establishment cost of mulberry garden for one hectare, the least cost components include the FYM application and cuttings preparation. But, the major

7 share of establishment cost in case of mulberry is taken by labour wages amounting to 65 per cent of the total establishment cost. The rent on land is considered as a proxy for land value. The land value is not considered because, the land value will always appreciate year by year, instead land revenue paid by the farmers to the government is considered. The variety considered is V-1 with Indo-JICA spacing of (150 cm+90 cm) X 60 cm. The expected leaf yield was 60,000 kg/ha/yr. For arriving at maintenance cost of mulberry, the recommendations made for V1 variety of mulberry are considered and the leaf yield expected was considered to be 60,000 kg per hectare per year. The major rearing cost was shared for the purchase of rotary mountages, construction of mounting hall and rearing house. Shoot rearing reduces labour (40 %) compared to leaf feeding method, CSR 2 XCSR 4 under favourable climatic conditions (3 crops) & CSR 18 XCSR 19 under unfavourable conditions (2 crops). Table 2.3: Costs and Return Structure in Cocoon Production for Rearing 800 dfls/crop (5 Crops/Year) Total DFLs Reared is 800x5=4,000 Sl. Particulars Cost/ Cost/ Cost of No. Revenue Revenue Production/ (Rs./ha/ (Rs./100 dfls) Kg Cocoon year) (Rs.) A. Variable Costs Mulberry cultivation cost 69,460 1, Silkworm rearing expenditure 76,500 1, B. Fixed Costs Apportioned establishment 5, cost of mulberry Depreciation on building & 59,320 1, equipments & interest on fixed costs Total Costs 2,10,525 5, C. Revenue Cocoon yield (Kg) Average cocoon price Cocoon production (Kg) 1, Income from cocoon 3,75,000 10, Income from by-products 5, Total Revenue 3,80,400 10, Net Revenue 1,69,875 2, Benefit: Cost Ratio The method of calculating the Benefit cost ratio is detailed in the Course 1. 23

8 Economics of Sericulture 2.7 ECONOMIES OF SCALE The cost of cultivation on the farm will differ with respect to the size of operation. The costs may increase or decrease as the size increases. This is because of the nature of distribution and utilization of the resources among the different size groups. This in simple terms is called as the economies of scale. Table 2.4 shows the same as the area under mulberry varies from 1 acre to 100 acres. Table 2.4: Economics of Sericulture Under Different Size of Holding Particulars Sericulture Farm Size A. COSTS ASSOCIATED I. MULBERRY CULTIVATION Non Recurring Cost: 1 acre 2 acre 5acre 10 acre 25 acre 50 acre 100 acre 10 batch 10 batch 10 batch 10 batch 15 batch 30 batch 45 batch model model model model model model model Apportioned 1,060 1,990 2,372 10,330 17,150 51,933 1,43,870 cost of establishment of mulberry garden Recurring Cost: Maintenance 32,615 77,515 1,06,560 2,65,060 3,25,322 6,00,643 12,81,306 cost of mulberry garden II. SILKWORM REARING Non Recurring Cost (Depreciation) a. Building 11,905 24,888 35,638 72,318 1,96,009 4,21,420 9,27,124 b. Equipments 8,950 17,900 21,600 48,212 1,12,320 2,41,500 5,16,810 Recurring Cost: Silkworm 30,600 61,200 83,102 2,56,390 6,34,685 14,02,540 29,67,920 rearing cost TOTAL COST (I +II) B. RETURNS GENERATED 85,130 1,83,493 2,49,272 6,52,310 12,85,486 27,18,036 58,37,030 Through sale 1,26,875 2,55,560 5,15,625 11,06,000 24,88,500 49,77,000 1,06,89,000 of Rs /kg TOTAL 1,26,875 2,55,560 5,15,625 11,06,000 24,88,500 49,77,000 1,06,89,000 RETURNS NET 41,745 72,067 2,66,353 4,53,690 12,03,014 22,58,964 48,51,970 RETURNS Cost : 1:1.50 1:1.40 1:2.06 1:1.70 1:1.93 1:82 1:1.83 Benefit ratio 24

9 From the above table, it is clear that the returns are not increasing in the same proportion as that of cost. Similarly, the total cost of cocoon production in case of one acre mulberry garden was found to be Rs.85,130. At this rate, the cost of cocoon production for 10 acres mulberry garden is supposed to be Rs.8,51,300. But, in real sense it is found to be Rs.6,52,310, which is less than Rs. 8,51,300. This decrease in cost of production is due to the operation of economies of scale. This happens because of the distribution of resources on the farm. For example, if 20 man-days of labour is employed on one acre plot for weeding, imagine that they complete the task in 7 hours. Another one hour (out of total 8 hours) they will be idle in the farm of a farmer who owns one acre or the farmer will be paying them for eight hours and fail to utilize them for all the eight hours. That means, the farmer is paying more and incurring high cost. This is what happens when the land is limited. On the other hand, if the farmer owns some more land, he can efficiently utilize this idle labour on another piece of land. This is what happens when the land size is increased and that s how the total cost of production gets distributed and will decrease as the size of land holding increases. The cost benefit ratio reached its maximum at 5 acres of mulberry garden and later on it decreased as the mulberry area increased and remained stagnant afterwards. Check Your Progress 3 1) Indicate whether the following statements are true or false: a. The break-even point is the point of maximum returns. [ ] b. Opportunity cost is an item in the cost of production of cocoons. [ ] c. Operation of economies of scale will decrease the cost of production as the size of business increases. [ ] d. Cost incurred on equipments can be classified under variable costs. [....] e. Fixed costs does not vary according to the level of production. [ ] f. Returns realized from the sale of rearing wastes is a part of gross returns. [....] g. Imputed cost of family labour is a part of fixed cost. [ ] h. Land value is not considered for calculating economics. [ ] i. Benefit cost ratio should be equal to zero for continuing business. [..] 2.8 LET US SUM UP Effective use of capital on the farm is very important as it helps to meet the important objective of accumulating wealth. The money before investing in capital has many alternate uses. Once the money is invested in a particular venture, it is not possible to get back the same unless the selected enterprise is profit oriented. This can be decided based on the opportunity cost. Once the enterprise is selected, the size of the enterprise has to be determined which can be known by the concept of economies of scale before being invested. Ultimately, one has to decide how much is to be produced for not incurring losses in the farm enterprise; 25

10 Economics of Sericulture this can be known by working out a simple break-even analysis, which indicates no profit or no loss situation. Finally, one should understand the items of costs and approximate requirement of inputs, labour etc., along with the requirement of capital to start sericulture and the expected returns. This can be understood by looking into the costs, yield level and returns. 2.9 GLOSSARY Break-even Point : It refers to a point of time in a business process wherein the firm achieves no profit or no loss position. In other words, it is the time where the firm recovers all the fixed and variable costs in the business. Bullock Pair Day : Quantum of work done by two bullocks including the man in a day of eight hours. Depreciation Economics of Scale Fixed Costs Man-day Net Returns Recommended Dose Revenue Tractor Hour Variable Costs : The fixed costs incurred in an enterprise will be divided equally throughout the economic life / production period. : It is the total costs and returns structure in a business unit worked out on size of operation of the farm unit. Usually the costs will be distributed as the size of the farm enterprise increases. : Those costs which can not be altered in the production process in relation to the level of production. : It refers to the quantum of work done by a human being in one day of eight hours. : The returns/income left out after meeting the apportioned fixed and variable costs in a production cycle. It is also called disposable income. : The quantity of an input authorized or recommended by the research institute. Quantity above the recommended dose will result in losses. : It refers to the income earned in a production / business unit by selling all it s products during a period of time. : The quantum of work done by a tractor in an hour including the operator. : Those costs which can be altered in the production process in relation to the level of production SUGGESTED FURTHER READING Jerome, D., Wiest, and Ferdinand, K. L A Management Guide to PERT /CPM, Prentice Hall of India Private Limited, New Delhi. Kumaresan, P. and Srinivasa, G Sericulture Extension Management, J. Sampath (ed.), Central Silk Board, Bangalore, India 26

11 2.11 REFERENCES http// http// ANSWERS TO CHECK YOUR PROGRESS Check Your Progress 1 1) Mulberry Cultivation: Mulberry seed material cost, irrigation cost, labour cost, electricity cost, costs incurred due to plant protection measures, fertilizers and manures, land revenue, land rent, etc. Silkworm Rearing Costs: Costs incurred on disease free layings, disinfectants, labour involved in rearing (permanent labour + hired labour + family owned labour), transportation cost, marketing cost of cocoons, depreciation, etc. Check Your Progress 2 1) It refers to a particular point of time when the firm recovers all the fixed costs invested and all the variable costs incurred in the production cycle. Check Your Progress 3 1) a. False b. False c. True d. False e. True f. True g. False h. True i. False 27