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Project Report on
Product Cost Analysis
Submitted to
Prof. Fareena Noor
Submitted by
Hassan Abbas (L3f08bcom2312)
Muhammad Saad (L3f09bcom2599)
Hafiz Islam Aslam (L3f08bcom2325)
Adil Naeem (L3f08bcom2314)
Osama Imran (l3f08bcom2366)
Section no.
B-5 (F)
Faculty of Commerce
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University of Central Punjab
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ACKNOWLEDGEMENTS
We are thankful to Almighty Allah for the countless blessings and infinite
mercy, which enabled us to complete this report work.
We wish to extend our sincere appreciation to our course instructor Ms.
Fareena Noor, under whose guidance and help, this report was completed. We are
thankful to her for her extremely valuable advises.
Our thanks also due to all the persons involved in our project report, without
whom it would be possible.
Hassan Abbas
Hafiz Islam Aslam
Muhammad Saad
Adil Naeem
Osama Imran
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EXECUTIVE SUMMARY
The purpose of this report is to fully understand the working of Bala Footwears. Bala
Footwears started its business in 1985 in Lahore, Pakistan. We have analyzed the whole firms
procedure and understood the work environment of the firm. In this report, weve incorporated
all the businesses and products of Bala Footwears. Apart from that detailed cost of the product
such as variable cost, fixed cost and profit calculations are provided in the report, economic
problems face by the production department, causes of failure of the product and suggestions to
increase the demand of the product are also included. The study indicates that there is potential
for higher growth of the industry and it can become a source of exports earnings. The study
suggests that in the rapidly changing environment and in the face of increasing cost of doing
business in Pakistan, there is a need to strengthen the competitiveness of the footwear industry in
Pakistan.
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TABLE OF CONTENTS
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Introduction of Company
Bala Footwear is one of Pakistans most quality conscious and progressive footwear
companies. Located in Lahore, it maintains a fine combination of comfort, style and
workmanship and is embarking upon appreciable growth plans for the future.
History:
Bala Footwear Co. was established in 1985 under the name ofBala Hawaii Chappal.
Under this brand name, companys main products are indoor slippers (including house slippers,
hotel slippers) and outdoor slippers (including clogs, flip flops and nude slippers) with the annual
production capacity of 1,300,000 pairs. With sincere services and high quality products, it has
built long term business relationship with many customers all over the Pakistan.
After several years of business, in 2005 a new division of Bala Footwear Co. was named
established Bala Eva. Equipped modern facilities, company is now able to produce all sorts of
EVA sandals and slippers, featuring high quality, novel style with competitive price. Company
always pays much attention to quality and quality control. Its footwear products enjoy a good
reputation for high quality due to have own raw material manufacturing unit to maintain the
quality.
With the success of companys products and support from customers all over the
Pakistan, now it has started to produce polyurethane slippers and sandals by using the new
technology called Direct on Upper under the Division formed in 2009 named Bala PU.
Equipped with a group of excellent production technicians, advanced equipment, it has great
ability and capacity in designing and developing new products.
In addition, it continually develops products and production process such as importing
advanced machinery from Taiwan, China and improving the quality of polyurethane.
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Hierarchy of the Organization:
CEO
Haji M. Aslam
Department Head
Haji M. AfzalDepartments Head
Haji M. Iqbal
Labor Dep.
Production
Dept
Stock Dep.
Finance Dep.Accounts
Dep.
Sales Dept
Import &
Export Dep.
Purchase Dep.
Shahid Iqbal Mehmood Ahmed Javed Iqbal Maqsood Ahmed
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Product Range:
Bala Footwear stepped into the footwear
industry in 1985. It started off with the
manufacturing of Hawaii slippers and subsequently
diversified into manufacturing following:
1. PU Shoes,2. EVA Close Shoes,3. PVC Shoes.4. Hawaii slippers.
Under the strict vigilance and support of the CEO of company Haji Muhammad Aslam, it
has carved a niche in the field of footwear items such as casuals PU Slippers and PVC Shoes.
Company was set with an objective of setting a modern plant for the purpose of manufacturing
Hawaii Chappals. The company is also recognized as one of the quality EVA footwear
manufacturers and suppliers from Pakistan.
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Introduction of the Product
The product which we have selected for analysis is PU Slippers. PU slippers can be
manufactured in different styles and designs i.e. light, tough, comfortable, flexible, waterproof,
hard-wearing or shock absorbent as required, simply by varying the formulation. When it comes
to everyday living for the modern woman, PU slipper is the ladies shoe that stands apart from the
rest. Featuring trendy designs and go-anywhere comfort, easy to maintain leather upper and
durability. The other features of PU slippers are as follows:
1. Direct attach PU outsole for durability and flexibility.2. Blend of fashion with comfort.3. Ideal casual wear.4. Attractive styling.
All the required calculations are given the proceeding part of this report.
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Economic Problems
PU Raw Material:In production, polyurethane resin (PU) is very important without it production is
not possible. One of the biggest issues is the availability of PU resin. In summers due to
increase in the demand of PU resin, chances of shortage of it increase.
When we talk about the PU resin, price variation also matters because half of the cost of
production per unit depending on it.
Electricity and Sui Gas shortage:In production, electricity is the only major element that leads to production. One
of the major problem is electricity shortage that results in the less production and increase
in per unit cost of electricity. Moreover Sui gas shortage also disturbs the production
process facing by many industries in Pakistan.
Artificial Leather:Artificial leather also matters in the production process. Now-a-days in Pakistan
prices of leather has also gone up. The PU resin is also the main production material for
making leather, so, both raw materials are increasing the production cost of PU Slippers,
damaging the prices of PU Slippers and the demand.
Lack of Skilled Labor:Without labor production is not possible, so factories cant forget the importance
of workers. The workers are the precious asset of the company if it is skilled, but
unfortunately in Pakistan most of the labor consists of unskilled and demands high
wages. So, company is relying on the less skilled labor affecting the standards of
production.
Intervention of Chinese products:The great availability of Chinese PU slippers in local market is giving tough
competition to the Bala PU slippers affecting their demand in the market.
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Production Analysis
The production of the PU slipper is based upon the demand of the various articles. The
company has more than 70 articles of PU slipper for both ladies and gents and cant make over
production of any specific article because its per unit cost is very high.
The Company is producing mainly on order bases by the retailers and wholesalers the
different markets of Pakistan. The company is also producing separate quota for exporting
purposes.
According to the company representatives, over production of an article without specific
demand may leads to blockade of money. In the production planning, one thing is very important
i.e. the current trends, designs and styles, because ignoring these issues or making out-datedstyles can result loss to the organization.
The production capacity of this firm for the PU slipper for 10 hours shift is 3000 pairs.
And it can produce the 75000 pairs per month.
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Fixed Cost related to Production of PU slippers (one month)
The factory place is also contributing to the productions of other three products so, the
Rent, labor salary and management salary is divided in four parts and one part is used as the
fixed cost of the PU slippers segment
Factory Rent Rs. 343000/4 = Rs. 85750
Factory Permanent Labor salary Rs.38000/4 = Rs. 9500
Management Salaries Rs. 80000/4 = Rs. 20000
Depreciation Expense
Manufacturing Plant Rs. 5000000 10% 1/12 = Rs.41667/monthTOTAL FIXED COST Rs. 156,917
Variable Cost related to Production of PU slippers (one month)
Polyurethane MaterialRs.5250000
Cutting ChargesRs.300000
Printing ChargesRs.300000
Embossing Charges
Rs.225000Upper LeatherRs.1875000
Inner LeatherRs.1125000
Upper-Man WageRs.525000
Bottom-Man WageRs.225000
Production labor WageRs.750000
Packing Trimming WageRs.450000
Electricity ChargesRs.375000
Packing MaterialRs.525000
Transportation CostRs.150000
Other Misc.expRs.375000
BucklesRs.675000
TOTAL VARIABLE COSTRs.13125000
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Cost Analysis
Variable Cost per Unit:
Items Rs.
Polyurethane Material 70
Cutting Charges 4
Printing Charges 4
Embossing Charges 3
Upper Leather 25
Inner Leather 15
Upper-Man Wage 7Bottom-Man Wage 3
Production labor Wage 10
Packing Trimming Wage 6
Electricity Charges 5
Packing Material 7
Transportation Cost 2
Other Misc.exp 5
Buckle 9
Variable Cost per Unit 175
Fixed Cost per unit:
Fixed Cost per unit = Total Fixed Cost / No. of Units
Fixed Cost per unit = 156917/ 75000 = Rs. 2.09
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Profit Calculations
The price selling charged by the company is as follows:
Price of PU slipper/unit = Rs. 195
Profit considering Average variable cost
Per Unit Profit = (PAVC)
Per Unit Profit = (195175)
Per Unit Profit = Rs. 20
Total Profit = Q (PAVC)
Total Profit = 75000 (195175)
Total Profit = Rs. 1,500,000
Profit considering Average cost
Average Total Cost per unit = Average Cost per unit + Average Fixed Cost per Unit
TC = 175 + 2.09
TC = 177.09
Per Unit Profit = (PAVC)
Per Unit Profit = (195177.09)
Per Unit Profit = Rs. 17.91
Total Profit = Q (PAC)
Total Profit = 75000 (195177.09)
Total Profit = Rs. 1,343,250
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Market Structure
The company is facing perfect competition because of the following conditions:
Number and size of sellers:
The size distribution of firms is also an important characteristic of market structure. In footwear
industry there are many sellers, however few are larger like Bata and Service etc. and rest are
medium and small scale.
Number and size of buyers:
Market can also be characterized by the number and size distribution of buyers. In the market,
there are many small buyers of PU slipper; all buyers are likely to pay about the same price.
Product Differentiation:
Product differentiation refers to the degree that the output of one firm differs from that of the
other firms in a market. Whereas the market selected product are undifferentiated and decisions
to buy are made strictly on the basis of prices.
Entry/ Exit:
Entry barriers are high however exit barriers are low. High investments and capital is required to
enter this industry .On the other hand technical knowledge, expertise and availability of skilled
work force makes entry barriers high. National and international level competitors are competing
at the same platform with minor variations.
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Pricing of Goods and Strategies
The company is using penetrating price strategy on the basis of their production cost.
They are pricing their products with low profit margin in order to increase the demand for
products and to stay competitive and to increase sales; hence increasing the market share.
The product is available in three different packaging depending on their quality of PU resins and
the quantity of order, the prices are as follows:
Package 1 prices = Rs. 185/unit
Package 2 Price = Rs. 195/unit
Package 3 Price = Rs. 210/unit
The product which we have used for calculation is package 2 having price Rs.195.
Causes of the failure of the product
1. One of the most important problems for failure of product is higher energy prices. Increasingenergy and inputs prices leads to an increase in the cost of production that influences the
expected production and the increased prices
2. Outdated production methods are still prevailing in the factory.3. Improper availability of raw material.4. Transportation and utility infrastructure facilities are not adequate.5. The company is facing high competition from china providing cheaper footwear product in
markets.
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Steps to Increase Demand
1. The company needs new techniques for production, product designs and there is great roomof improvement in marketing of the product. The company is not giving adequate importance
to the marketing of their product.
2. The company needs to build the outlets at domestic level and should improve distribution toappropriate sellers.
3. Participation in trade fairs can increase the opportunities to find market for their exports aswell as unexplored domestic markets.
4. The company needs to develop the research and development department for improvingquality and physical testing of their products.
5. Use of e-commerce strategies can broaden their product market and customer net.
Advertisements and Promotions
There is great need of promoting the products as Bala is not well established in the
sense of Brand name and people are not familiar with its, so, the company should use following
modes of promotion and advertisement of their products, we are not recommending television
ads as it is expensive mode of advertisement and company is producing on cost effectiveness.
The company should use following modes of advertising
1. Road side boards2. Newspaper ads3. Promotional pamphlets
The companys major mode of advertising should be road side bill boards and pamphlets.
Other Recommended promotional schemes company should Introduced are:
1. Buy one and get second one at 25% discount for final customers.2. For wholesalers, giving them allowances on achieving the target sale in a month or year.
And greater profit margins for the retailers and wholesalers.
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Companys role in the economy of Pakistan
Some sectors of Pakistan economy have shown a good performance in terms of
production and exports. Footwear is one such industry which has increased its exports at largely
extent last 6-7 years.
Pakistan footwear industry manufactures around 150 million pairs annually for local
consumption and it exports 2.2 million pair per annum roughly and the average price charged for
each pair stands for $10. The population of Pakistan is expected to be about more than 172
million in the year 2011, keeping in view the growth in population, the growth in the demand of
footwear industry is also anticipated.
As far as Bala Footwear Co. is concerned it has pivotal importance in terms of providingand creating jobs, earning of foreign exchange with the help of exports and fulfilling the local
consumption requirements. The company has more than 150 workers and executives working
directly and indirectly. The companys major importing countries are France, Australia and
Dubai.
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Bibliography
Managerial Economics [Book] / auth. Petersen Lewis, Jain. - [s.l.] : Prentice Hall, 2008. - Vol.
fourth edition.