Heavy Duty Shipping Sacks Manufacturing Accounting Essay

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The significant growth of global trade in recent years has led to higher demand for transportation of products and material which results in higher demand for protective heavy duty shipping sacks (HDSS).

With the high demand for HDSS in the petrochemical industry, the Middle East has turned into a lucrative market place. Comprehensive assessments for the viability of manufacturing HDSS in the UAE, Process, Raw Material, Human Resources, Machinery & Equipment, Construction, Required Capital for this purpose, Break Even Analysis and Profitability evaluation of such manufacturing plant have been reviewed an analyzed.

Financial analysis results such as Return on Investment and Internal rate of Return that persuaded on the provisional 6 years Profit & Loss and Cash flow statement of this production plant, along with other advantages, set manufacturing of HDSS in the UAE feasible and profitable.

1. Introduction

The increase in the supply of food and chemical products in the Middle East has resulted in a high demand for effective packaging solutions. However, as of today, few companies have invested in quality automatic effective Form Fill and Seal machines for packaging of dry free-flowing products such as pigments, fertiliser, salt, quartz sand and animal fish fodder. In order to produce and deliver high grade heavy duty shipping sacks with extreme impact strength, excellent seal ability and impressive glossy appearance, modern packaging operations require good quality films. These products are manufactured with ingredients developed to stand up to the harsh elements of outside storage, good sealing, toughness, rigidity, hot content capability and shape retention.

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The heavy-duty sack industry has been showing some changes based on the prices of raw materials as well as the production technologies. The effect of those variables will determine the growth of this sector in the near future. Heavy-duty sacks, with thicknesses between 110 to 180 microns, are used to transport bulky materials from one place to another and are designed to carry products weighing more than 10 kg (22 lb) to 50 kg (110 lb).

The market size alone in the Gulf Cooperation Council (GCC) was estimated to be 100,000 MT for 2006 and 335,000 MT for 2010, with an average annual growth rate of 50%. Very important in the growth of the market are the price changes for the raw materials and the development of new technologies and structures.

2. Applications

Very often the products packaged in the HDSS are bulky and heavy. A typical application is to package raw materials, including plastic resins in pellet or powder form such as Polyethylene (PE), polypropylene (PP), polystyrene, and chemical products such as sulphur. Also using this type of packaging are food items such as salt and sugar and items including pet food, sand, de-icing salt, fertilizers, and potting soil, among others. A common weight for a filled sack of these applications is 25 kg (55 lb).

Common application of HDSS in different industries is illustrated on the table 1.

Industry

Form

Product

Chemical

Granular

Polymers

Master batches

Caustic soda

Chemicals

Powder

Polymers

Pigments

Salt

Hazardous goods

Sand

Metallic powder

Minerals

Agriculture

Granular

Powder

Fertiliser

Peat and soil

Seeds

Food

Granular

Pet food

Fish fodder

Animal fodder

Table 1- HDSS Applications

3. Determining the Product Specifications

The product specifications will be determined by the film's mechanical properties, physical properties, behaviour expected once the sack is stored, and dimensional requirements.

The tensile properties of the film must resist the forces and loads during the filling operation, plus the loads resulting from handling and storage. The following aspects must be considered during sack design to achieve the properties needed:

� Product weight and temperature at time of filling

� Type of filling system

� Handling and storage conditions

� Seal type at the bottom and top of the sack.

The weight of the product being packaged is extremely important for the design. Normal thickness for weights around 10-15 Kg (Approx 20-30 lb) is 96.5 or 100 microns (3.8 or 4.0 mils). If the contents' weight is around 25 kg (50 lb), which is the case of resin sacks, the thickness goes between 140-180 microns (5.5-7 mils). New materials and technologies are allowing thicknesses to be reduced to about 120 microns. Also very important is the sack's resistance to the load occurring in storage. Due to the methods used to store or palletize the sacks, sometimes they must resist 10 or even 20 times the weight of the product packaged.

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As a consequence, the sack must be rigid enough to avoid deformation in the transversal direction. This problem becomes more critical when the temperatures in the storage place are higher than 30 deg C (87 deg F). The resin selection for the film structure must consider this problem as well.

The air used to transport and feed the material tends to inflate the sack. As a result, the film must be rigid enough to avoid deformations and thickness reduction. Small perforations in the film could be used to help in the air evacuation without deteriorating the film properties.

Tear resistance of the film is very important because of increased risk of puncture and damage to the sack in the storage place and during transport. The integrity of the sack under critical conditions such as pressure, impact, and mishandling is guaranteed by good sealing properties. Although impact could occur during transport and handling, more important is the resistance to the impact generated when the sack falls from heights around 2.5 meter (9 ft) or more at the storage place.

The film's slipping characteristics are very important for this application. The sack should have a high Coefficient of Friction (COF) on the outside to prevent sack slippage once it is palletized. Some modifications to the film surface can be made to increase the COF, including embossing or by introducing additives into the resin.

Also important is the ability to print the product description and manufacturer information on the sack surface. The sack requires a surface treatment to permit a good ink adhesion, and the inks must have abrasion resistance.

Dimensional requirements must be considered, including method of transportation, common dimensions of the pallets, and number of units per pallet to ensure good pallet stability and reduction of the slippage risk.

4. Production Process

Plastic film production consists of the mixing of Polyolefin resins together with pigment or additive masterbatches that are converted into films on rolls.

4.1. Polyolefins

Polyolefins are the most widely used materials for the manufacture of films. The film producer can choose from a large variety of polyolefins types to meet the end user requirements for price and performance. Those polyolefins have the following attributes:

� Density: density range, effect of density

� Melt Flow Index: effect of MFI

� Molecular weight distribution

Polymers with Narrow Molecular Weight Distributions show lower melt strength. They generally have greater stress cracking resistance and better optical properties. LDPE, LLDPE, their blends, and HDPE are used for the majority of applications.

4.2. Extrusion Process

The first phase of film production is the extrusion process. The extruder is commonly defined by the diameter and the length/diameter ratio (L/D) of the screw. Its design depends on the type of polymer being processed.

Figure 1- Extrusion components

4.3 Blown Film Extrusion

Film blowing is the most commonly used technique. About 90% of all polyethylene films are manufactured on blown film lines. The polymer melt stream coming out of the extruder is shaped into a tubular blowing head (tubular die).

Figure 2- Blown Film Extrusion Components

1. Extruder

2. Tubular Die

3. Film Sizing Unit

4. Haul-Off Unit

5. Winder

Bubble Cooling: Bubble cooling occurs when air emerges from the cooling ring (mounted directly on the die outlet), which cools down the external surface of the bubble. The volume, speed, temperature of air, as well as the direction of air stream, determines the rate of cooling. Superior cooling performance is achieved when internal cooling is also used: an air exchange system "inside" the bubble brings in fresh air and removes internal air (as well as volatiles) from inside the bubble. This Internal Bubble Cooling (IBC) system significantly increases the throughput of the blown film line.

Film Sizing System: The bubble is then calibrated in a Film Sizing System. The sizing system scans the bubble with a sensitive contact device. The internal pressure is held constant so that the dimension of the bubble remains uniform.

Haul-Off Unit: At its upper end, the bubble is gradually flattened by collapsing frames and then guided to a nip roll assembly. Some lines have oscillating haul-off units to minimize the thickness variability in the final roll of film. This offers an alternative to the use of rotating dies.

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Winding Unit: The film is then tightly wound on a cardboard tube (called a core).

4.4. Co-extrusion

Co-extrusion is used in the production of multilayer films; it combines more than one layer with different materials and thicknesses. The main reason for co-extrusion is to take advantage (in one film) of the desirable properties of the individual components or film layers.

Blown film Co-extrusion is the preferred process to produce heavy-duty sacks. Tear strength and the impact resistance of this type of film are far superior than cast extruded film. The estimated market share for monolayer films is approximately 55% versus 45% for coextruded structures. Co-extrusion allows more material combinations, special effects on the outside surface, and downgauging.

4.5. Conversion into Final Product

Once the tubing or the single sheet is produced, it needs to be converted into the final sack. This requires printing process to print customers� markings and bag specification as per customer requirements on the bags. On the other hand palletizing and stack-ability of the bags must be enhanced to prevent slippage in shipping and storage by side gusseting and embossing the surface of the sacks.

Tubular gusseted and embossed roll is produced specifically for Form Fill Seal machines. This type of film is more popular in GCC and Europe where there is a trend toward using automatic filling machines running at speeds of 2,000 sacks per hour.

5. Material

The traditional materials used for the production of heavy-duty sacks are PE including Low Density (LD), linear Low Density (LLD), and High Density (HD). Depending on the final application and the mechanical properties required, LLDPE is used alone or in blends with the other materials. Butene LLDPE, among the different LLDPE types available, is used most widely due to the balance between price and properties obtained.

LLDPE provides very good tear resistance, sealing properties, and puncture resistance. When it is blended with LDPE and HDPE, a typical blending ratio is 60%-75% LLDPE and 20-15% LDPE and 20-15% HDPE. It is important to select the appropriate LLDPE grade, because too much flexibility will be detrimental to the dimensional stability of the sack under load and temperatures.

Alternatively, LLDPE can be the major component. Fractional melt resins such as LDPE help with bubble stability, have better melt strength, and provide a better impact resistance to the film. Typical melt index values for LDPE are better around 0.25-0.8 g/10 min. Melt index values for LLDPE generally are around 0.5-1.5 g/10 min.

6. Machinery & Equipments

Production of HDSS requires Co-extrusion 3-layer Polyethylene machinery. Co-extrusion machinery provide possibility of mixing different PE grades with different characteristic to make a composition of material to enhance the performance of the film for Heavy Duty applications.

After performing competitor analysis and studying machinery suppliers, four advanced European suppliers have been nominated to supply required machinery. Technology, efficiency, output, delivery period and price of the machinery from each supplier listed and according ranked.

Blown Film Extrusion Machine

X

Y

Z

W

Rank

4

3

2

1

Width (mm)

400-1000

400-1000

400-1000

400-1000

Thickness (micron)

100-250

100-250

100-250

100-250

Max Output (Kg/h)

220

250

250

320

Power consumption (KW/Kg)

1

1.1

1

1

Delivery Time

7 months

6 months

6 months

7 months

Price (USD)

4,885,000

5,400,000

5,450,000

5,060,000

Table 2- Blown Film Extrusion Machine Price Comparison

Printing & Converting Machine

X

Y

Z

W

Rank

4

2

3

1

Width (mm)

1000

1000

1000

Thickness (micron)

100-250

100-250

100-250

Max Output (Meter/min)

250

250

250

Power consumption (KW/Kg)

0.2

0.2

0.2

Delivery Time

4 months

4 months

4months

Price (USD)

995,900

1,220,000

995,900

Table 3- Printing & Converting Machine Price Comparison

Machinery supplier W could be the best choice due to advanced technology and high output and reasonable price. Delivery time is also negotiable to be reduced down to 6 months yet in view of the length of construction phase which is considered to be 8 months. Hence, machinery delivery time will perfectly fit to the project schedule. Supplier W is also capable to supply the Printing & Converting machine with advanced technology and synchronised with its Blown Film Extrusion line and last but not least reasonable price.

6.1 Production Machinery Cost

Total required machinery costs which is including of 3 Extrusion line and 1 printing and Converting machine, costs AED 16,175,900.

Table 4- Production machinery Cost

Machinery

Price/unit

Qty

Cost

Three-layer Blown Film Machine

5,060,000

3

15,180,000

Printing & Converting Machine

995,900

1

995,900

16,175,900

7. Human Resources

Production of HDSS requires experienced operators and engineers who are familiar with the machinery and operation.

For the calculation of the cost of Human resource of for HDSS Production plant, manpower categorized in three levels;

� Overhead labor such as CEO, Sales Managers, Admin Executives, Secretaries and drivers.

� Indirect labor such as Engineers, Purchasing.

� Direct labor such as technicians, operators, supervisors and helpers.

Following conditions has been considered for Annul Manpower cost

� The policies are based on UAE labor law.

� Overhead labor to get fix amount of basic and allowance salary with no over time.

� Indirect labor to get basic & allowance plus applicable overtime at the rate of 25% of hour based salary. Over time not to exceed 12 hours per week.

� Direct labor to get basic & allowance wage plus applicable overtime at 25% of hour based salary. Overtime not to exceed 30 hours per week.

Total required Manpower to run the plant 24/7 and total salary is listed in the table 5.

Table 5- Required Manpower and Salary

Position

Basic

Allowance

Basic/h

Max Overtime (Hour)

Overtime Salary

Annual Salary

Number

Total

CEO

18,000

8,000

312,000

1

312,000

Manager

7,000

4,000

132,000

2

264,000

Executive

4,200

2,800

84,000

1

84,000

Procurement

4,200

2,800

20

12

303

87,635

1

87,635

Engineer

4,200

2,800

20

12

303

87,635

1

87,635

Technician

2,160

1,440

10

30

389

47,873

2

95,746

Worker

1,800

1,200

9

30

325

39,894

14

558,519

22

1,489,535

8. Raw Materials and availability

Aside from state of the art machinery, the production of HDSS requires high quality raw material which is readily available in the GCC. Borouge Petrochemical Company (Abu Dhabi), which produces Polyethylene (PE) with bimodal technology with annual capacity of 800,000 MT, has been targeted as one of the key suppliers. In addition, Sabic (KSA) and Qapco (Qatar) are other two suppliers which produce PE grades for production of HDSS. Other PE manufacturers in KSA and Kuwait may also act as future suppliers to cover possible future expansion plans.

Today in the market, Borouge LLDPE PE�s material combines excellent processing characteristics with final film toughness. Other key benefits of Borouge�s bimodal LLDPE for heavy-duty sacks include:

� Excellent combination of high impact and seal strength, thus reduces risk of package bursting during various stages of package life � from filling to transportation to end use

� Superior load retention and minimise deformation of package in use

� Material savings and lower costs

A typical blend for manufacturing HDSS in order to provide very good tear resistance, sealing properties, and puncture resistance is with a ratio of 60%-75% LLDPE and 20-15% LDPE and 20-15% HDPE. Generally, LDPE has got higher price than LLDPE due to its power consumption during the process and HDPE is cheaper than LLDPE due to its normal characteristic with less value added in the overall quality.

Table 6 demonstrates annual consumption of each material and the overall cost for the first year of production total Raw Material cost calculated based on year 1 production capacity.

Table 6- Raw Material Consumption & Cost

Material

Price/Ton

Consumption

Year-1 Tonnage

Cost

LDPE

4,000

15%

578

2,886,354

LLDPE

4,784

70%

2,695

12,892,880

HDPE

3,600

15%

578

2,639,175

3,850

18,418,400

9. Civil Construction

The most suitable land size to be allocated for HDSS production plant should be 10,000 Sqm with 5,500 Sqm of covered building for factory building and warehouse. Other buildings such as Admin office, laboratory and utility room also must be considered. This project also requires other machineries and equipment such as Utility Installation, Handling & transportation equipments and Laboratory Equipments.

For such complicated project which requires close relationship between Owner, Design team and Contractors. Furthermore to accomplish the project within the budget and in the time fare with no major delay and due to small executive team of owner in initial stage, it has been recommended to utilize Agency Construction Management Contracting method. In this arrangement, the owner holds direct contractual relationship with both the design professional and the contractor, but also retains the services of an independent construction manager to coordinate between two other entities. Construction Management Agency also should prepare Bill of Quantity (BOQ) and schedule the project based on the Design and prepare a set of bidding documents for the prime contractors. Contractors also must be prequalified based on their past experience on the similar size complex projects and their resources. This provides assurance to the owner that there is some degree of assurance that all contractors� submitted bids are qualified and capable of successfully performing and they are bidding against relatively equal competitors.

The contract with Prime contractor must be at Fixed Price method using BOQ and fully developed specification as the source of required material with considering penalty for delay. This contract presents a low financial risk for the owner and the required investment level can be established at an early date.

However, the contract type with the Construction Management Agency should be Unit Price type which CMA defines its fixed unit price for the Time & Manpower which it spends on this specific project only.

Civil construction has been classified into three sub categories of Design & Drawings, Buildings Construction, and Utility Installation. Maximum budget allocated for each unit was calculated considering current typical price for construction of same size and same type units.

9.1 Design & Drawings

For the preliminary phase of civil construction, a full design of factory layout and mechanical, electrical and plumbing design and drawing is required to be done by machinery supplier. The cost of Design is shown on table 7.

Table 7- Design & Drawings Cost

Description

Cost

Design

200,000

200,000

9.2 Buildings Construction

Construction of the buildings specified for this project including site preparation, factory building, office and laboratory, warehouse and utility room cost is shown in table 8.

Table 8- Building Construction Cost

Description

Area (m2)

Price / m2

Value

Site Preparation

10,000

18.4

184,000

Factory Building

4,000

120

480,000

Office Building

300

1,000

300,000

Laboratory

80

184

14,720

Ware house

1,500

120

180,000

Utility room

40

100

4,000

1,162,720

9.3. Utility Installation

The cost of utility installation and required mechanical, electrical and plumbing is shown on table 9.

Table 9- Utility Installation Cost

Description

Cost

MEP

895,000

Safety & Fire extinction system

300,000

Air conditioning

200,500

1,395,500

10. Other Machinery and Equipments

Owner should also procure other required machinery and equipments and make sure that those items delivered just after civil phase completion and before production machinery installation. Other machinery and equipments has been classified into three sub categories of Other Equipments, Handling and Transportation Equipments, and Admin & IT Equipments. Maximum budget allocated for each unit was calculated considering current typical price for construction of same size and same type units. Maximum budget allocated for each unit was calculated considering current typical price for construction of same size and same type units.

10.1. Other Equipments

The cost of other equipments required for the production and Quality Control of products and maintenance of machinery is shown on table 10.

Table 10- Other Equipment Cost

Machinery

Cost

Cooling systems & Automation

202,400

Warehousing equipments

107,500

Laboratory equipments

184,000

Repair equipments

73,600

Overhead crane

135,000

702,500

10.2. Handling & Transportation Equipments

The cost of necessary Handling & equipments is shown on table 11.

Table 11- Handling & Transportation Equipments Cost

Vehicle

Number

Price/unit

Value

Passenger car

1

65,000

65,000

Van

1

85,000

85,000

Forklift

1

84,000

84,000

234,000

10.3. Admin & IT Equipments

The cost of necessary Admin & IT equipments is shown on table 12.

Table 12- Admin & IT Equipments Cost

Items

Cost

IT Equipments

29,800

Photocopy

5,000

Fax

700

Furniture

44,000

Stationary

3,000

82,500

11. Investment Capital

Total required Investment capital for this project likewise any other project is segmented into Investment capital for Fixed Asset and Working Capital. Fixed Assets costs inclusive of Design & Drawing cost, civil construction cost, machinery & Equipments and Utility Installation have explained on last chapters. Land wouldn�t be considered as a fix asset since the allocated land for this project shall be on Long Term Lease Agreement with the Industrial Aria Land Authorities. Investment capital for Fixed assets is shown on table 13.

11.1 Investment Capital for Fix Asset

Table 13-Investment Capital for Fixed Asset

Asset

Asset value

Land

-

Factory & Office Building

1,162,720

Machinery & Equipments

16,878,400

Utility Installation

1,395,500

Handling & Transportation Equipments

234,000

Admin Equipments & IT

82,500

Design & Engineering

200,000

19,953,120

11.2 Working Capital

The working capital required for preliminary operation of the project, startup and commissioning and raw material was calculated based on parameters which demonstrated on table 14.

Table 14- Working Capital

Asset

Description

Value

Raw material

4 months required raw material (13)

6,139,467

Wages

6 months wages (10)

739,200

Petty cash

4 months days utility cost

259,067

7,137,733

11.3 Total Investment Capital

Total Investment capital required for HDSS Production Plant is Fix Asset Capital requirements plus 10% of asset values as contingency plus required working capital.

Total Investment Capital = 19,953,120 + 1,975,312 + 7,137,733 = AED 29,066,165

12. Sales Price

Generally, HDSS customers procure packaging materials through a long term supply agreement. HDSS is a packaging material and daily being used. Therefore, customers procurement in order to maintain proper amount of stock and save money (economy of scale) and prevent production delay, utilizes Long term supply agreement in which the total quantity and delivery schedule is well specified.

Pricing also is set in a formula which is consisting of two parts of Fix Conversion Price and Variable Main Raw Material Price.

Fix conversion cost is inclusive of Direct and Indirect Production cost, Packaging, Transportation, Legalization and profit of HDSS supplier. This fixed Price must be fixed for the entire Agreement period.

Variable Main Raw Material Price is the monthly Price of PE which customers reimburse the same. Normally an international Polymer Price publishing is considered as the bench mark.

The pricing strategy of Fix conversion cost is mainly determined by the market forces and the existing competition. As per competitor intelligence survey, current HDSS conversion rate is about 2.79 AED/Kg and there has been noticed a history price increment trend of almost 10% over last few years. Therefore, it is highly recommended to consider at least 1% less than current conversion rate at 2.76 AED/Kg to have competitive advantage over existing rivalry.

13. Direct Production Costs

Direct Production Costs are those resources that are expanded solely to complete the production of final finished products. Costs of Raw Material, Direct Labor, Power & Water, Packaging & Shipping, and maintenance were considered as Direct Production Cost of HDSS.

13.1 Raw Material

Raw material cost for the first year of operation is shown on table 15.

Table 15- Raw Material Cost

Material

Price/Ton

Consumption

Year-1 Tonnage

Cost

LDPE

4,000

15%

578

2,886,354

LLDPE

4,784

70%

2,695

12,892,880

HDPE

3,600

15%

578

2,639,175

3,850

18,418,400

13.2 Direct Payroll

Direct Payroll for the first year of operation is shown on table 16.

Table 16- Direct Payroll

Position

Annual Salary

Number

Total

Procurement

87,635

1

87,635

Engineer

87,635

1

87,635

Technician

47,873

2

95,746

Worker

39,894

14

558,519

829,535

13.3 Electricity & Water

Electricity & Water cost for the first year of operation is shown on table 17.

Table 17- Electricity & Water Cost

Unit

Price/unit

Daily consumption

Annual consumption

Total annual cost

Water

M3

3.6

20

2,000

7,200

Electricity

KWh

0.2

3,000

3,850,000

770,000

777,200

13.4 Packing & Shipping

Packing & Shipping cost for the first year of operation is shown on table 18.

Table 18- Packing & Shipping Cost

AED/Kg

Qty

Cost

Packaging & Shipping

0.18

3,850,000

693,000

693,000

13.5 Maintenance

Maintenance cost for the first year of operation is shown on table 19.

Table 19- Maintenance Cost

Asset

Asset value

Percentage

Cost

Building

1,162,720

1%

11,627

Machinery & Equipments

16,878,400

1%

168,784

Utility Installation

1,395,500

1%

13,955

Transportation

234,000

5%

11,700

Admin Equipments & IT

82,500

10%

8,250

214,316

14. Indirect Costs

Indirect costs are those resources that need to be expanded to support the production but that are also associated with other activities such as Admin, legal and annual charges. Costs of Admin Expenses, Indirect Payroll, Insurance & Land Lease, and Depreciation were considered as indirect cost for production of HDSS.

14.1 Indirect Payroll

Indirect Payroll for the first year of operation is shown on table 20.

Table 20- Indirect Payroll

Position

Basic

Allowance

Annual Salary

Number

Total

CEO

18,000

8,000

312,000

1

312,000

Manager

7,000

4,000

132,000

2

264,000

Executive

4,200

2,800

84,000

1

84,000

660,000

14.2 Insurance & Land Lease

Insurance & Land Lease cost for the first year of operation is shown on table 21.

Table 21- Insurance & Land Lease Cost

Item

Cost

Insurance

76,000

Land rent

67,000

143,000

14.3 Admin & Other Indirect Overheads

Admin & Other Indirect Overheads cost for the first year of operation is shown on table 22.

Table 22- Admin & Other Indirect Overheads

Item

Cost

Admin & Other Indirect Overheads

500,000

500,000

14.4 Depreciation

Straight line method has been utilized for the calculation of depreciation. Assets considered with no salvage value which is so pessimistic in this case. Asset depreciable life varies depends to its nature and life cycle. Depreciation is shown on table 23.

Table 23- Depreciation

Asset

Asset value

Percentage

Cost

Building

1,162,720

5%

58,136

Machinery & Equipments

16,878,400

10%

1,687,840

Utility Installation

1,395,500

10%

139,550

Transportation

234,000

10%

23,400

Admin Equipments & IT

82,500

20%

16,500

1,925,426

15. Break Even Analysis

Break even analysis involves finding the level of sales necessary to operate a business on break-even basis.

Selling Price (SP) = 7.54

Variable Cost (VC)= 5.164 (Raw Material, Energy, Packing & Shipping)

Fixed Costs (FC)= 4,272,277 (Payroll, Maintenance, Insurance & Lease, Admin Cost, Depreciation)

Break Even Point = FC/SP-VC

Break Even Pont = 1,795,074 Kg

BEP= 1,795,074 Kg

Table 24- Break Even Point

Another valuable date that Break Even Analysis provides is the lowest possible sales price or rock-bottom price that sales price could be set to cover fix and variable cost without occurring any loss.

Quantity (Qty) = Year 1 sales = 3,850,000

Variable Cost (VC)= 5.164 (Raw Material, Energy, Packing & Shipping)

Fixed Costs (FC)= 4,272,277 (Payroll, Maintenance, Insurance & Lease, Admin Cost, Depreciation)

Min SP = (FC + (Qty x VC))/ Qty

Min Sales Price = 6.275 AED

16. Financial Analysis

To perform financial analysis and 6 years forecast such as Profit & Loss Account, Cash Flow, Return on Investment (ROI) and Internal Rate of Return (IRR) following assumptions have been considered.

Capacity

Maximum Nominal Capacity (Kg)

8,000,000

Production rate to nominal capacity for Year 1

49%

Production rate to Nominal capacity- Maximum capacity reached

96%

Total Investment Required (AED)

Fixed Capital

21,928,432

Working Capital

7,137,733

Total Capital

29,066,165

Leverage ratio (Debt/Equity)

1.37

Equity

12,266,165

Loan

16,800,000

Interest Rate

6.50%

Loan repayment period

5 years

Loan repayment per year

3,360,000

Year 1 Values (AED)

Conversion rate per unit

2.76

Sales price per unit (Conversion + Raw material Price)

7.54

Raw material price per unit

4.784

Energy

777,200

Direct Payroll

829,535

Indirect Payroll

660,000

Maintenance

214,316

Sales & Official Costs

500,000

Packaging & Shipping Cost

693,000

Fixed Overheads

143000

Depreciation (Stay constant)

1,925,426

Increase in values per year

yearly increase in conversion rate

10%

yearly increase in cost per year

10%

Raw material price remains constant

16.1 Profit & Loss Account

PARTICULARS

Year-1

Year-2

Year-3

Year-4

Year-5

Year-6

Maximum Capacity (Kg)

8,000,000

8,000,000

8,000,000

8,000,000

8,000,000

8,000,000

Sales (Kg)

3,850,000

5,200,000

6,400,000

7,400,000

7,600,000

7,700,000

Production Rate(%)

48%

65%

80%

93%

95%

96%

Conversion Rate (AED/Kg)

2.760

2.898

3.043

3.195

3.355

3.523

Sales Price per Unit (AED/Kg)

7.54

7.68

7.83

7.98

8.14

8.31

Turnover

29,044,400

39,946,400

50,092,160

59,044,933

61,854,859

63,960,336

Raw Material Price (AED/Kg)

4.784

4.784

4.784

4.784

4.784

4.784

Raw Material Cost

18,418,400

24,876,800

30,617,600

35,401,600

36,358,400

36,836,800

% Of Revenue

63%

62%

61%

60%

59%

58%

Energy

777,200

1,040,000

1,280,000

1,480,000

1,520,000

1,540,000

% Of Revenue

2.68%

2.60%

2.56%

2.51%

2.46%

2.41%

Direct Payroll

829,535

912,489

1,003,737

1,104,111

1,214,522

1,335,974

% Of Revenue

2.86%

2.28%

2.00%

1.87%

1.96%

2.09%

Maintenance

214,316

267,895

334,869

418,586

523,232

654,041

% Of Revenue

0.74%

0.67%

0.67%

0.71%

0.85%

1.02%

Packing & Shipping

693,000

942,480

1,159,250

1,344,730

1,479,204

1,479,204

% Of Revenue

2.39%

6.50%

6.50%

6.50%

6.50%

6.50%

Direct Production Cost

20,932,451

28,039,664

34,395,457

39,749,027

41,095,358

41,846,018

% Of Revenue

72%

70%

69%

67%

66%

65%

Indirect Payroll

660,000

726,000

798,600

878,460

966,306

1,062,937

Admin & Other indirect Over Heads

500,000

560,000

627,200

702,464

786,760

881,171

Insurance & Land Lease

143,000

143,000

143,000

143,000

143,000

143,000

EBIDT

7,468,949

11,203,737

14,926,504

18,450,442

19,829,741

21,090,146

% Gross Profit Margin Ratio

26%

28%

30%

31%

32%

33%

Depreciation

1,925,426

1,925,426

1,925,426

1,925,426

1,925,426

1,925,426

EBIT

5,543,523

9,278,311

13,001,078

16,525,016

17,904,315

19,164,720

Interest

1,010,100

791,700

573,300

354,900

136,500

-

Interest Cover

6x

14x

29x

65x

195x

Tax

-

-

-

-

-

-

Net Profit

4,751,823

8,705,011

12,646,178

16,388,516

17,904,315

19,164,720

% ROS

16%

22%

25%

28%

29%

30%

16.2 Cash Flow Statement

PARTICULARS

Year-1

Year-2

Year-3

Year-4

Year-5

Year-6

Free Cash Before Interest & Dep.

7,468,949

11,203,737

14,926,504

18,450,442

19,829,741

21,090,146

Interest

1,010,100

791,700

573,300

354,900

136,500

0

Net Cash Acquired Before Loan repayment

6,458,849

10,412,037

14,353,204

18,095,542

19,693,241

21,090,146

Repayment of Loan

3,360,000

3,360,000

3,360,000

3,360,000

3,360,000

0

Net Cash Inflow For The year

3,098,849

7,052,037

10,993,204

14,735,542

16,333,241

21,090,146

Accumulated Cash

3,098,849

10,150,886

21,144,089

35,879,631

52,212,872

73,303,018

16.3 Internal Rate of Return (IRR) & Return on Investment (ROI) Analysis

In order to consider what leverage ratio (Debt/Equity) should be taken before investment, two options have been evaluated and IRR and ROI which are two vital profitability indicators of any projects, are calculated.

16.3.1 Equity 100%

IRR Analysis with 100% Equity

Equity

29,066,165

Leveraged Cash Flow

-29,066,165

7,468,949

11,203,737

14,926,504

18,450,442

19,829,741

21,090,146

IRR

33%

ROI = Average yearly Net Profit for 5 years / Total capital invested

ROI = 43%

16.3.2 Equity 42% & Debt 58%

IRR Analysis with 42% Equity

Equity

12,266,165

Leveraged Cash Flow

-12,266,165

3,098,849

7,052,037

10,993,204

14,735,542

16,333,241

21,090,146

IRR

55%

ROI = Average (Yearly Net Profit � Repayment of Loan) for 5 years / Total Equity Invested

ROI = 69%

Based on the ROI and IRR calculation, a leveraged investment at the ratio of 1.38 would be more profitable in long term. Therefore, investors shall raise equity equal to 42% of total capital investment with the amount of AED 12,266,165 and accordingly apply for project loan with the amount of AED 16,800,000.

Total Capital

100%

29,066,165

Equity

42%

12,266,165

Loan

58%

16,800,000

Table 25- Equity & Loan

17. Summary and Conclusion

The current demands and growth rate of the HDSS market requires more supplies entry into the market. Available production technology and state of the art machinery ensure a productive and efficient production compare to other existing manufacturer. Availability of raw material in the region and short distance of transportation and logistics for supply of raw materials and delivery of finished goods to the regional market and utilizing enhanced transportation system of the UAE, brought a positive evaluation feedback and set such project as feasible.

Analysis results of this study also have shown that with sales of only 22.5% of the total capacity, this project reach to its break-even. Other values, such as low fixed cost and low energy cost in the UAE, risk free pricing strategy and tax free revenue, make investment in this project with minimum risk and highly profitable.