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Project for manufacture of Potato Chips

Technical Report · June 2005

DOI: 10.13140/RG.2.2.32276.50560

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Emmanuel V Murray
National Bank for Agriculture and Rural Development
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 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
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.
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?
 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. - 3000 kg. Potato @ Rs. 5/kg 15,000

Edible oil - For 1000 kg. Chips - 100 kg. Oil @ Rs. 50/kg 5,000

Plastic bags 1000 kg. X Re. 1/kg 1,000

1000 kg
Cooking Gas ----------------- ---- = 3.00 Cylinders @ Rs. 400 1,200
330 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 month @ Rs. 40/kg 40,000
---------
Profit 12,550
----------
Contribution
Revenue - Variable Cost
40,000 - 22,200 = 17,800
Rs. 17800
Contribution per unit (kg) = ------------- = Rs 17.80/Kg.
1000 kg
Working Capital Assessment (Rs.)

Edible oil - 100 kg. Consumption in 25 days

======
So,10 days Consumption = 40 Kg. @ Rs. 50/kg 1,000

Plastic Pouches - 40 Kg x 10 days = 400 kg. 400

Cooking Gas Rs. 1200 x 10 days

--- 480
25 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. 27.45 16,470
---------
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 59,500
---------
Interest @ 12 % per annum 7,140
---------
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 6260
--------

Break Fixed Cost Rs. 6260

Even = --------------------- = ------------ = 352 Kg. per month or 14 kg per day
Point Unit Contribution Rs. 17.80

Net Profit
Margin on Sales = ------------ X 100 = 31 %
Sales
Annual Returns Rs. 1,50,000
Return on Investment = --------------------- ----------------
Total Investment Rs. 74,350

= 203 %
 Trainers note on Project for Manufacture of Potato Chips

This case exercise is essentially for developing a project report for a small micro-
enterprise.

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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