PRODUCTION AND COST

ANALYSIS OF BEVERAGE
INDUSTRY
Group Members:
Aashima Mittal 15P002
Akash Gupta 15P005
Jayram Palnitkar 15P025
Palash Arora 15P035
Sameer Jain 15P045
Varun Baxi 15P045

Processing
Juice or the pulp from fruit is
the starting material
Soft fruits, such as papaya,
can be pulped in pulpers
which brush the fruit through
a sieve and eject the skin
and stones.
Smaller models of this
machine can be
manufactured and are
commercially available.

PULPING

EXTRACTIO
N
With a fruit press, fruit
mill or hand
pulper/sieve.
By crushing/pulping
with a mortar and
pestle and then
sieving through
muslin cloth or plastic
sieves.

The process differs

considerably
depending upon the
type of product.

FERMENTA
TION

Beer Brewing
Process is far more complex than soft drink production especially due to long lead times in
fermentation/maturation.
Consists of four stages
Fermentation
Mashing

Boiling

Involves the use of hot

water (approximately
68C) to extract the
soluble materials from the
malted grains.
Carried out in large
vessels which may be
made of wood or stainless
steel.

Involves the addition

of hops.
Takes place in a
similar vessel to the
tubs used for mashing
except that it is flaskshaped

The beer is held in

vats or food-grade
plastic bins.
After fermentation the
process of packaging
will depend on
whether the beer is to
be sold in draught
form or bottled and

Filtration
In the case of
bottled beer, it is
filtered and
pasteurized

Packaging
The packaging is done in one of the following ways Glass bottles High in cost, reuse requires high sanitation conditions
Plastic bottles Low in cost, cant be reused
Tin cans High in price, cant be reused
Tetra packs High in cost, keeps the beverage fresh
The beverage industry have a dedicated packaging requirement as the final product is a
liquid which needs to be protected from contamination. Thus, this is a high investment for the
beverage industry. Increasing the fixed cost.
Different types of packaging are available in market for different type of products. Perishable
beverages like juices are provided in tetra packs to retain their freshness. Beverages like beer
and wine are provided in glass bottles and cans for immediate consumption. A large market of
carbonated drinks in covered by plastic bottles because of ease of production in many sizes.
Many beverage companies outsource their packaging while many have acquired their
packagers in order to have supply chain extension. Big companies like coca cola and Pepsi
have consolidated their bottlers for better control.

Distribution
The distribution network of a particular beverage firm includes following
Warehouse
Distributor
Retailer

To meet the demand of the market a large stock has to be kept which
increases inventory costs and hence beverage industries have high
inventories.
Also since there is a three-tier distribution system, the cost of transport is
also high in this. Hence high overheads are incurred which increases the
variable cost of production. To reduce this, generally plants are set up in
the areas of high demand.

Identifying Costs of Production

Fixed Costs of Production
Manufacturing and non-manufacturing indirect costs required to manufacture beverages
Include the rent or mortgage payments on factory and office building, the property taxes and utilities
expenses
Insurance premiums and the depreciation taken on the factory and office buildings and production
equipment
Salaries paid to non-hourly employees, including factory floor supervisors andcorporate executives

Variable Costs of Production

Incurred by the company only when the production is in progress
Includes labour wages, costs of inputs, costs of electricity, costs of wear and tear due to wearing out
Transportation costs, advertisement fees and security of goods while in transit or in the warehouse

Some Definitions
Production Function

Production function, in economics, equation that expresses the relationship

between the quantities of productive factors (such as labour and capital) used and the
amount of product obtained. It states the amount of product that can be obtained from
every combination of factors, assuming that the most efficient available methods of
production are used.
Cost Function
Cost function, in economics, function that gives the minimum cost of producing a
given level of output from a specific set of inputs, such as labour and capital.
Short Run
One or more inputs is fixed and have constraints. Generally, this input is the capital
input.
Long Run
No input is fixed as firms generally follow an expansion path.

United Breweries Ltd.

An Indian conglomerate company headquartered in UB City, Bangalore in the state of

Karnataka
Annual sales of over US$4 billion and a market capitalization of approximately US$12 billion
Core business includes beverages, aviation, electrical and chemicals
Markets beer under the Kingfisher brand and owns various other brands of alcoholic
beverages
India's largest producer of beer with a market share of around 48% by volume with 79
Name
Type
distilleries and bottling units across the
world
Kingfisher
Lager
Recently, financed a takeover of the spirits
business
of the rival Lager
Shaw-Wallace company,
Kalyani
Black Label Strong Lager Lager
giving it a majority share of India's spirits
business
Premium Ice Beer
Lager
Active beer brands:
Raj Cobra
Taj Mahal Premium Lager

Year
Total
Revenu
e
Total
Fixed
Cost
Total
Variable
Cost
Total
Cost

Lager
Lager

2014
7,261.8
4

2013
6,530.2
3

2012
5,799.0
7

2011
4,604.5
0

2010
2,955.8
0

2009
2,460.4
5

2008
1,980.2
8

2007
1,481.8
0

2006
906.1

2005
631.9

1,606.9
2

1,593.9
9

1,218.6
9

1,089.1
0

768.33

672.84

522.72

363.57

201.55

109.71

3,693.5
1
5,300.4
3

3,543.7
9
5,137.7
8

2,635.1
9
3,853.8
8

2,157.2
4
3,246.3
4

1,803.3
3
2,571.6
6

1,493.5
4
2,166.3
8

1,166.7
3
1,689.4
5

911.84
1,275.4
1

544.67

447.56

746.22

557.27

Company Cost and Revenue in Indian operations over the period 2004-15 (in Rs. Crores)

Short Run Cost Function

Analysis:
In the short run, the fixed costs including
land, building, plant and machinery,
furniture, office equipments, R&D
equipments and vehicles remain constant
and much of the increase in production is
with the increase in variable cost including
purchase of raw material, power and fuel,
employee salary and wages, packaging
materials, repairs and distribution expenses.
For United Breweries the overall costs of
plant operation have increased from Rs. 557
Cr to Rs. 1275 Cr, an increase of Rs. 718 Cr.
The increase is mainly accounted by an
increase of Rs. 460 Cr in total variable cost
( 65% of change in total costs of operation).
Change in fixed cost is Rs. 250 Cr
representing 35% of change in total costs of

Short Run Production Function

Analysis:
In the short run, as more variable factors of
production including labour are employed, it
leads to better utilization of fixed capital. As
a result the production increases at an
increasing rate as the Marginal Revenue of
Variable factors is positive and increasing.
In the beverage industry in short run, the
variable factors of production includes
purchase of raw material, power and fuel,
employee salary and wages, packaging
materials, repairs and distribution expenses.
From above graph it is evident that initially
the total revenue increase at an increasing
rate as more labour and raw material is
employed and then increases at a decreasing
rate since Marginal Revenue of variable
factors starts to decrease.

Long Run Cost Function

Analysis:
The point at which firm expands, the total
cost increases at a higher rate and this
point is known as point of Inflection.
Here, in this graph, we can see that the
point of inflection occurs in the year 2012.
This means that United Breweries must
have aimed for expansion in this year.
Hence, Firm must have incurred an extra
Administrative and Managerial Expenses
for the proper working of new plants and
machineries.
Before this Point of inflection, the total
fixed cost for the firm tends to increase at
a decreasing rate which is a general
phenomenon in short run.
Also, after the point of inflection, the total
fixed cost for the firm is also tending to be
almost constant as the production capacity

Long Run Production Function

Analysis
This is a typical Graph of Long Run
Production function. The slope of the graph
is constant initially which increases
suddenly as the optimisation of the plant
increases. This optimisation is achieved by
achieving excellence in different aspects. In
beverage industry, this optimization can be
achieved at many levels. The basic
formulae of the product can be modified,
cheaper inputs can be identified and used,
machines can be used to their full capacity
and even an adequate distribution can be
set up with time.
Following this, the slope again decreases as
firm again aims at expansion and hence the
optimisation is lost. Thus, the production
function rises. This slope can again be

Plant Optimization
Returns to Scale

Analysis:
When factors of production are increased in the long run, the return will a firm get in terms of output
increase is given by the concept of Returns to scale.
At United Breweries we see that Average Total cost up to a production level of Rs. 5799 Cr decreases
representing economies of scale for the plant operation. Beyond Rs. 5799 Cr the average total cost
starts to increase as the plant operation enters in the region of diseconomies of scale.