Project Proposal for manufacture of Potato Chips

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Beverley McKinney
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1 Project Proposal for manufacture of Potato Chips Introduction Potato Chips have become a popular snack food in cities and towns. The bigger branded products have high visibility in the TV and mass media through advertising. Simultaneously, there has been a boom in the market for small local producers as well. Mrs. Ravi, a housewife in Pune who is a graduate in Home Science wishes to establish a Potato Chips making unit. She made enquiries and obtained the following information from a unit in operation. Raw Material Potato, the main raw material is available in plenty in areas like Pune and Satara. Since it is locally grown, it is available in fresh condition at reasonable prices. While the price of potato fluctuates with season, the average price is around Rs. 5 per kg. The unit keeps stock of 10 days consumption at all times. Capital Expenses To manufacture potato chips, the following equipment is required: A wafer making machine with a 0.33 HP motor, costing Rs. 36,000/-. A gas stove with big burners, gas cylinder, a frying pan and utensils. All these together cost Rs. 10,000/-. A plastic bag sealing machine costing Rs. 1000/-. Electrical fittings and wiring costing approximately Rs. 1000/- and Other related expenses of Rs. 2,000/-. Process of Chips manufacture The potatoes are first washed and peeled. For making chips, only medium sized potatoes can be used. Hence, care must be taken while procuring, to minimize waste. The washed potatoes are cut into thin slices using the wafer-making machine. The cut slices are then fried in oil. Salt and other masalas and additives are added to get the required flavouring Case Exercise Prepared by E.V. Murray, Faculty Member, CAB, Pune

2 For making 1 Kg of chips, 3 Kg of potatoes are required, as also 100 gms of oil (average cost Rs. 50/kg). The consumption of LPG is 1 cylinder for every 330 Kg of chips manufactured. Each cylinder of cooking gas costs about Rs. 400/-. Plastic bags for packing cost 10 paisa per bag of 100 grams capacity. Labour charges are Rs. 75 per day per worker. Normally, two workers are required in the unit. Rent, electricity and other expenses come to Rs. 1500/- per month. Normally, the unit works for 25 days a month, and the daily production on an average is 40 kg chips per day. The unit always maintains stock of 10 days requirement of edible oil, plastic pouches and cooking gas. Sales and Income The potato chips are bagged and sealed and then given to local shops for retail sale. The average price realization is Rs. 40 per Kg. The unit allows 15 days credit to the shops. Assignment (1) Based on the above information, prepare the economics of the potato chips manufacturing unit for Mrs. Ravi and suggest whether she should take a loan and establish such a unit. (2) What are the other factors that need to be considered by the entrepreneur before deciding to set up a Potato Chips making unit? (3) What are the major risks associated with the project and their impact on the project? What strategies to you suggest to manage / mitigate the risks.

3 What would be the impact on viability in the following scenarios? If 20 % Potato wastage occurs due to small size and blacking. If oil consumption increases by 50 %. If for 1 kg chips, 4 kg of potatoes are required. If the marketing capacity is only 500 kg. per month. The average price of potatoes during the last 6 months was as follows: (Rs. / Kg.) January 4 February 5 March 6 April 7 May 7 June 7 What is the implication of the above price data for the proposed project?

4 PROJECT FOR MANUFACTURE OF POTATO CHIPS: WORKSHEET Production Capacity - 40 Kgs/day 25 days/month = 1000 Kg per month x 12 months = 12,000 Kg. Capital Expenditure (Rs.) Wafer Making Machine 36,000 Gas Stove and Cylinder 10,000 Plastic punch sealing machine 1,000 Electrification 1,000 Other expenses 2,000 Total 50,000 Monthly Expenses Potato - For 1000 kg kg. Rs. 5/kg 15,000 Edible oil - For 1000 kg. Chips kg. Rs. 50/kg 5,000 Plastic bags 1000 kg. X Re. 1/kg 1, kg Cooking Gas = 3.00 Rs , kg/cylinder Labour charges Rs. 75 x 2 x 25 days 3,750 (Fixed Cost) Other Expenses (Rent, Electricity etc.) 1,500 (Fixed Cost) 27,450 Variable Cost - 22,200 Revenue/Sales realisation 1000 kg per Rs. 40/kg 40,000 Profit 12,550 - Contribution Revenue - Variable Cost 40,000-22,200 = 17,800 Rs Contribution per unit (kg) = ---- = Rs 17.80/Kg kg

5 Working Capital Assessment (Rs.) Edible oil kg. Consumption in 25 days ====== So,10 days Consumption = 40 Rs. 50/kg 1,000 Plastic Pouches - 40 Kg x 10 days = 400 kg. 400 Cooking Gas Rs x 10 days days Potatoes: Daily Consumption 40 kg x 3 = 120 Kg x 10 days 1200 Kg x Rs. 5/kg 6,000 Receivables (15 days) Daily Sales = 40 Kg. x 15 days 600 Kg x Cost of manufacturing Rs ,470 Total Working Capital requirement 24,350 Total Project Cost Capital Cost 50,000 Working Capital 24,350 74,350 Margin 20 % (Rounded off) 14,850 Bank Loan 59, % per annum 7,140

6 Fixed Cost (per month) (Rs.) Wages to Labour 3750 Other expenses 1500 Depreciation 415 (Rs. 5000/12 months) Interest 595 (Rs. 7140/12 months) Total Break Fixed Cost Rs Even = --- = --- = 352 Kg. per month or 14 kg per day Point Unit Contribution Rs Net Profit Margin on Sales = --- X 100 = 31 % Sales Annual Returns Rs. 1,50,000 Return on Investment = Total Investment Rs. 74,350 = 203 %

7 Trainers note on Project for Manufacture of Potato Chips This case exercise is essentially for developing a project report for a small microenterprise. In such projects, the entrepreneur has to 'explore' the market and get a feel of the activity he plans to enter into. The study of a few existing units will give good insight into the activity for which the entrepreneurs has to get access to the unit. The data collection has to be through conversational style enquiry, and for this, it is useful, if the entrepreneur is aware of what questions to ask and what information to gather. Most of the data will not be in a ready to read off form, but have to be captured by carefully sifting through the data obtained in the course of conversation and any other written matter made available. It is very essential for small entrepreneurs to "know their business line" before they enter it, and hence, it would be good to help them explore these rather than giving a ready-made profile which would close their effort at independent enquiry. Converting these pieces of information into a simplified project report or Project Profile is the next stage. This requires the use of some very basic financial tools like capital cost, working capital, fixed cost, and break-even etc., which also need to be explained to the entrepreneur. This case exercise is an effort at helping one to navigate through the process from data collection through profile preparation. Having done this for a sample activity, one would develop a general feel of what data is required for preparation of a project profile and how to go about collecting the data. It is requested that those who use this case as a training tool, provide feedback on its utility and effectiveness in training, and suggest how the case exercise could be further improved to me at evmurray@yahoo.comor evmurray@gmail.com. Of course, trainers are free to modify the case exercise to suit their convenience and ease of use, but it would be appreciated if these modified case exercises are shared, to enable learning from experience sharing.

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