Term+Loan+Appraisal (2)

7/30/2019 Term+Loan+Appraisal (2)

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Technical Analysis:

Technical analysis is essential to ensure that necessary physical facilities required for production will be available and the best possible alternatives is selected to procurethem. These are to be assessed by common sense, experience and discussions with the

promoters

1. Manufacturing Process / Technology

2. Technical arrangement

3. Size of the plant

4. Product Mix

5. Selection of Plant and Machinery

6. Procurement of Plant and Machinery

7. Plant lay out

8. Location of the plant.

I. Land

II. Raw Material

III. Market

IV. Labour

V. Utilities such as water, Power, fuel etc.

VI. Effluent disposal

VII. Transportation

9. Schedule of Project Implementation


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1. Manufacturing Process / Technology

If a product can be manufactured by using alternative raw materials withalternative process routes, a comparative study should be done to choosethe most suitable process depending upon the quality of product required,

its end use.

If a product is to be manufactured by a particular process for the first timein the country, necessary study should be done about the success of the

process in other countries.

2. Technical arrangement

Technical arrangement made to obtain technical know how required for the proposed project.

Support to be provided by technical collaborators in planning anddesigning of the project

Selection and procurement of equipment, installation and operation of the plant, training etc.

Collaborator has agreed to provide the benefits of research anddevelopment.

Any restriction imposed by collaborator (Exports etc.)

3. Size of the plant

Size of the plant depends on the manufacturing process, availability of raw material,capital investment, size of the market.

Size of the plant or capacity can be expressed in one of the following terms:

1 With Respect to the output( quantity of finished product)

Pulp and paper, Cement, Steel, etc.

2 With Respect to input( quantity of main raw material used)

Sugar Mill, Cottonseed expeller unit,Solvent extraction plant.etc.

3 With respect to number or machines Power looms, Spinning Mills, TextileMills etc.

The concept of economic size of the plant changes with the changes in technology, price structure, availability of raw material, demand of the product and other circumstances.


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4. Product Mix

Product mix or product range depends upon market requirement of certain items mayhave to be done in different sizes and quality to suit different consumers.

If plant may have flexibility to change product mix according to changes in themarket conditions, such flexibility may need additional investment, its impact on theviability of the project be analysed.

5. Selection of Plant and Machinery

Selection of plant and machinery should be done according tomanufacturing process and size of the unit. Different stages of manufacturing process should have proper balance of capacity.

A product has to pass through 4 stages and the capacity of proposed

machinery for each stage is as under

Production CycleRawMaterial Stages

I II III IV FinishedGoods

Capacity 90 80 60 80

The total capacity of the plant in above case will be considered as 60 units becausethe capacity in the third stage of process is only 60 units.

Equipments for utilities (Power, water, fuel etc) should also have sufficient

capacity to meet the requirements of main plant and machinery.

Adequate provisions should also be made for tools and spares.

6. Procurement of Plant and Machinery

The machinery suppliers should be decided keeping in view the quality of the machine, the reputation of the suppliers, delivery schedule, paymentterms , performance guarantee and other relevant matters.

It is not always necessary to procure machinery from suppliers whosequotations are the lowest.

If the project is being implemented on turnkey basis , the reputation of EPC contractor, main terms and conditions of contract to be analyzed.

If promoters proposes to import second hand machinery a certificate fromchartered Engineer giving details of its history, present performance,


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valuation, economic life and suitability of second hand machinery should be obtained .

In order to have uninterrupted production, it should be ensured thatsatisfactory arrangements for repair have been made and necessary spare

parts will be available in time.

7. Plant layout

Proper plant lay out can reduce manufacturing cost by savings time andmoney .

Plant lay out be done in such a way that minimum time is taken in handlingequipment , raw material, consumables, goods in process and finishedgoods .

8. Location of the plant.

I. Land Land should be sufficient for the proposed project and thefuture expansion plans.

Load bearing capacity of the land should be ascertained.

Proposed land should be non agriculture and approved for Industrial use.

II. Raw Material The requirement of raw material at full capacity should beascertained and it should be ensured that necessary rawmaterial will be available at reasonable price.

If raw material is bulky and difficult to transport, it is better to locate the plant near the source of raw material.

Regular supply of raw material is very necessary for thesuccessful operation of the plant.

III. Market While deciding location of the project, a comparative studyregarding transportation of raw material and finished

products should also be done.

If transportation of finished products is more difficult than itsraw material, it may be better to set up project near to themarket.


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IV. Labour Sometimes skilled labour is not available at a particular place. If labour has to be obtained from outside ,arrangements to providehousing facilities analyzed.

V. Utilities such as water , Power, fuel etc.

Arrangement for utilities power, water, fuedl etc to be ensured. If there is shortage of power supply alternative arrangement be wayof Gen Sets etc be ensured.

VI. Effluent disposal

The problem of effluent differs from industry to industrydepending on nature and quantity of effluent.

It should be ensured that necessary treatment is provided theeffluent unit .

VII. Transportation

If the proposed site is not connected with main road, an approachroad may have to be laid from the site to the main road.

The quality of road may be decided keeping in view the quantumof goods to be transported.

If the unit proposes to buy their own vehicles cost benefit analysis

be made, by calculating deprecation, interest and other expenses of maintaining vehicle compared to vehicles engaged on hire basis.

9. Schedule of Project Implementation

The Project Evaluation and Review Technique ( PERT) or Critical Path Method(CPM) helps in proper planning , scheduling and controlling various activitiesessential for the execution of the project.

All possible activities from project identification to commencement of productionshould be listed.

It should be ensued that all the activities have been included and the time schedulegiven by the promoter is reasonable.

Arrangement should be made to procure necessary raw material inputs like rawmaterial, power, labour etc appropriate time so that plant does not remain idle and theimplementation may commence soon as the installation of the plant is completed.


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Commercial & Market Analysis:

Major Headings Information NeededDemand Product, Uses, the consumers, actualconsumption, likely consumption in futureand exports

Supply Production Capacity, actual production,Capacity utilization, Imports and likelyfuture capacity.

Distribution Channels of Distribution involved, the costof distribution and the mode of transport

Pricing Domestic and international price trends,control on prices, duties and taxes

External forces Government Policies regardingindustrialization, exports, imports, foreigncollaboration, Plan outlay etc.


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Financial Analysis:

1. Capital Cost of Project

I. Land and Site Development. II. Buildings

III. Plant and Machinery IV. Engineering and consultation fees

V. Miscellaneous Fixed AssetsVI. Preliminary and Pre operative Expenses

VII. Provisions for contingenciesVIII. Margin Money for Working Capital

2. Sources of Finance.

3. Financial Projections I. Profitability Estimates

II. Cash flow Estimates III. Projected Balance Sheet

4. Ratio Analysis I. Debt Equity Ratio

II. Current Ratio III. Debt Service Coverage Ratio IV. Fixed Assets Coverage Ratio

5. Break Even Point


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Capital cost of Projects and sources of Finance

Estimation of capital cost of the project provides the basic information to decide its pattern of financing and viability. If cost of project is not estimated correctly, the preparation of cash flow and profitability estimates will be futile exercise because theamount of deprecation , interest and dividend will change with the change in the capitalcost of the project.

Lenders generally are taking an undertaking from the promoter to meet the cost over run ,if any, in the implementation of the project. But such an undertaking does not have much

practical meaning. Many a times a promoter is not in a position of tobring additionalresources sto finance the overrun, ultimately Lenders have to provide the additionalresources to safeguard the money already invested in the project.

Overestimation of the cost of the project is also equally bad as underestimation. If thecost of a project is overestimated, the Financial Institution may have to makeunnecessarily higher commitments and the promoters may divert resources for other

purposes


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Estimation of the capital cost of the project is necessary not only in the interest of the promoter but also in the interest of the lender.

DETAILS OF CAPITAL COST OF PROJECT AND METHODS OF ANALYSIS

SrNo

Particulars Items to be included Documents/Particulars to beScrutinized

A Land andSiteDevelopment

Cost of LandLegal Charges andRegistrationCost of levellingCost of laying RoadsCost of fencingCost of Gates

Ascertain from plant layoutand proposed construction of

buildings that land issufficient for the project and

possible future projections.Agreement for purchase of landRates of legal chargesTotal area of road and cost

per sq meter.Total area of fencing and the

basis on which provision has been made.

SrNo


B Buildings Main factory buildingAncillary factory buildingAdministrative buildingGodownsCanteen, Guest Housesetc.Quarters for essential staff Soils , tanks, wells etcGaragesCost of sewers, drainagesecArchitects fee

Design of buildingsDifferent types of construction and areaunder each type of constructionAscertain from plantoutlay whether

proposed constructionof building is sufficientand also no unnecessaryconstruction is done.Rate per square meter of each constructionAgreement with

building Contractor, if anyA note on past record of

building contractor andArchitect.

SrNo



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C Plant andMachinery

Imported Plants

FOB value of plant to beimportedShipping, freight and

insuranceImport dutyClearing Loading ,unloading andtransportation chargesFoundation andinstallation charges

Ensure that proposed plant is necessaryEnsure that necessary

stores and spares arealso imported.Quotations of plant to

be importedOrders, if already

placed of plant to beimported.Import licenseReport of anindependent Engineer,if second hand plant is

being imported.

Indi genous PlantMain Plant and other MachineryMachinery stores andsparesSales taxTransportation chargesFoundation and

installation charges

List of main items of machinery to be purchased

Ensure that all items aeincluded and they have

proper balance of capacity

Cross check with somereputable potentialsuppliersFrom whom the promoterscould have asked, but havenot asked to bid or quote

Selection should be doneon the basis of not only

price but also technicalsophistication, reputationof suppliers, delivery datescredit terms, etc.

Orders of machinery if any placed

Contact entered betweenthe company andmachinery suppliers.


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SrNo Particulars Items to be included Documents/Particulars to beScrutinizedD Engineering

&ConsultancyFees

Expenses of foreigntechniciansExpenses of training for Indian techniciansTechnical Know howfeesExpenses on drawingsConsultancy fees for

preparing project report.

Contract betweencompany and foreigncollaborator Contract betweencompany andconsultantsA note on past record of consultantsRelationship, if any,

between promoters of a project and consultants.

SrNo


E Misc FixedAssets

FurnitureOffice machinery andequipmentsVehicle Cars, trucks etc.Cost of electricinstallationEquipments and pipes for distribution of water , air and steamLaboratory EquipmentWorkshop EquipmentFire fighting EquipmentsEffluent collection,treatment and disposalarrangementsMisc fixed assets.

Details of various items of furniture, office machinery,equipment, etc and cost thereof.

Ascertain whether it isnecessary to invest in vehiclesfor the project. Estimate cost of

maintaining vehicles (s) andcompare with transportationcharges to be paid , if outsidevehicles are hired.

Contract regarding electricinstallation, piping etc.

Price list of laboratoryequipment , workshopequipment etc.

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F Preliminaryand PreoperativeExpenses

Market Survey,Feasibility Report,Project ReportBrokerage andCommission on capital

Find the total amount of Capital Issue andcalculate chargesthereon


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issueOther Capital issueExpensesCommitment chargesInterest on Term Loans

during construction periodMortgage ExpensesMisc Expenses duringconstruction periodCash losses if any

Find the construction period and calculateinterest for that period

Calculate the amount of

mortgage expenses.

Calculate other expensesduring construction

period.

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G Provisions forContingencies

Probable increase in cost due tonew additions

Probable increase in cost due torise in prices, sales tax, exciseduty, transportation charges,fluctuation in foreign exchangerates etc.

Divide total costestimates into twogroups consideredFirm and Non Firm

Make provisions for contingencies for nonfirm items of cost at therate of 5% to 15%depending uponinflationary trend and

period of projectimplementation.

Longer the projectimplementation, higher the contingenciesrequired.

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H Marginmoney forworkingCapital

Indigenous Raw Materialrequired.

Imported Raw Material

required

Consumable stores

Stock of goods in process

Outstanding debtors.

Calculate total requirement of working capital on the basis of expected production in firstyear. However, if profitabilityestimates of first year indicatecash loss, take working capitalrequirement on the basis of the

production for second or thirdyear when the project is likelyto get the profit.


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The level of raw materials,consumable stores, goods in

process, finished goods anddebtors should be decidedkeeping in view of production

requirements, process time and practice prevailing in theindustry.

25% of the total current assetsshould be financed by long termresources and included in thecapital cost of the project.


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Means of Finance:

1. Promoters contribution2. Debts

Promoters contributions

The minimum promotor's contribution envisaged in the project is worked out on the basisof Debt-Equity norm and the security margin norm applicable at the time of sanction of the loan. The debt equity ratio is the ratio of loan component and the equity contributionin the total project cost. The maximum amount of assistance shall be lower of the twoamounts worked out on the basis of Debt-Equity norm and the security margin norm. Thenormal lending norm for debt- equity is 2:1, however in some specific schemes this normmay be flexible.

The entire promoter's contribution envisaged in the project is desired to be raised by wayof capital before first disbursement of the loan installment. However in case the

promoters are short of own capital, some amount may be raised as unsecured loans in theform of quasi-capital. The quantum is ascertained during the appraisal of loan proposal.

Promoters contributions include;

1) Share Capital to be subscribed by promoters2) Unsecured Loans from promoters3) Equity shares issued as rights to existing share holders4) Convertible debentures/bonds issued as rights to existing share holders.5) Cash Accruals.

Central or State Subsidy is treated as equity for debt equity ratio, however,it is not counted as promoters contribution because the finance does not

come from promoters.

If it is felt that the Subsidy form center or state will not be available duringthe project implementation period, bridge loan to be set off against thesubsidy receivables may be considered.

Debt equity ratio is generally allowed about 2;1 depending upon nature of the project , its location, promoters background etc.


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Higher debt equity is allowed for projects promoted by Technocrats,capital intensive projects, projects located in backward areas etc.

Profitability Estimates

Profitability estimates are estimates of expected sales realizations and expenses to beincurred by the unit. Excess of sales realization over expenses indicates the expected

profit of the unit.

Items to be included in profitability estimates:

Sales RealizationsRaw Materials and Consumable Stores.Utilities ( Power, fuel, Water etc)Repair and MaintenanceWages and salariesRent insurance etc.Depreciation

5% on Building10% on Plant and Machinery ( Add 5 % for every extra shift)20% on Misc fixed AssetsContingencies provided in the estimation of capital cost of project should

be added to the fixed assets proportionately to ascertain the value of fixedassets for calculating depreciation.Preliminary expenses upto a limit of 2.5% of the project cost ( excludingmargin money for working capital ) can be written off from profits at therate of 10% every year over a period of 10 years.If preliminary expenses are more than 2.5% of capital cost , the excess

portion and also pre operative expenses should be added to fixed assets proportionately to ascertain that value of fixed assets for calculatingdeprecation on them.Depreciation to be calculated on straight line method for the purpose of

profitability estimates and on written down method for the purpose of taxcalculations.

Administrative expensesSelling ExpensesInterest on Term LoanInterest on Bank BorrowingsProfit.


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CASH FLOW ESTIMATES

Cash flow estimates are prepared to ensure that unit will have necessary cash with it andit will not face liquidity problems

While profitability estimates are prepared only from the year in which unit os likely tocommence production, Cash flow estimates are necessary for the construction period alsoto ensure availability of cash according to the requirement of the project.

Sources of funds :

1) Share Capital2) Term Loans/ Debentures3) Net profit after deprecation and writing off preliminary expenses but before

interest and taxes.4) Depreciation5) Preliminary Expenses written off.6) Deferred Credits7) Trade Credits8) Bank Borrowings9) Capital Subsidy from Government.10) Development Loans / Sales Tax Loans in notified areas.11) Unsecured Loans and deposits.12) Any other Source.

It is presumed that level of production , current assets, and current liabilities will remainin the same proportion once the utilization of capacity and expected production is

presumed stable at a particular level after first 2, 3 or 4 years.

Uses of funds:

Capital ExpenditurePreliminary Expenses.Curent assets Increase in level of inventories/ deferred credits.Decrease in Term Loans /debentures/deferred creditsDecrease in secured loans/ public deposits.


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Repayment of bank borrowingsInterestTaxationDividendsAny other items.

The level of inventories and book debts will increase in first 2-3 years with the increasein the level of production.

Decrease in Term Loans/debentures/ unsecured loans /deferred credits is to be shown as per proposed repayment schedule.

The difference between sources and uses of funds indicates the net cash surplus or deficitarising out of movement of funds in the year.


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Projected Balance Sheet

Projected balance sheets are prepared on the basis of profitability estimates and cash flowestimates.

The position of share capital , term loans, sundry creditors, bank borrowings,current assets etc is ascertained at the end of each year, according to themovement shown in cash flow and profitability estimates.

Fixed Assets are taken after deducting depreciation provided in profitabilityestimates.

Preliminary expenses are taken after deducting the amount which is alreadywritten off from the expected profits of the unit.

Cumulative surplus shown in profitability estimate represents the position of

reserve at the end of each year.

Closing balance shown in cash flow estimates represents the position of cash and bank balances at the end of each year.


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Ratio Analysis:

Debt Equity Ratio: Debt/ Equity

Current Ratio : Current Assets/ Current Liabilities

Debt Service Coverage Ratio:

The ratio indicates the capacity of the unit to repay term debt and interest thereon .

Profit after tax + Depreciation+ Interest on term Debt + Lease rentals if anyRepayment of term debt + Interest on term debt + lease rentals if any.

The ratio is calculated for the entire repayment period separately for each year and also asan average for the entire repayment period.

Fixed Asset Coverage Ratio:

Term Loans are generally sanctioned against the security of fixed assets. The excess of fixed assets over Term Loans secured by them provides margin on security. In order tofind out the available security cover , Fixed Asset coverage Ratio is calculated as under:

Net Fixed Assets + Capital work in progressDeferred Credits + Term Loan + Secured Debentures + other loans having first charge onfixed assets.

In case of exiting units , fixed assets to be created for implementation of the project are added to the present fixed assets, similarly Proposed term loans areadded to existing term loans if both have pari passu charge on fixed assets.

If any fixed asset is having specific charge for a particular Loan, the amount of such fixed asset and loan should be excluded.


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In case of New units, proposed fixed assets will cover the proposed Term Loan.Proposed fixed assets will be equal to the entire capital cost of the project exceptthose preliminary expenses which will not be capitalized.

The fixed assets coverage ratio depends on debt equity ratio. Higher the debt

equity ratio, lower will be the margin available because the amount of term loanwill be higher for creation of fixed assets.

Break Even Point.

Break even point is the point at which the unit is neither earns profit nor incurs losses. The cost of production is just recovered at break even point.

The cost of production is divided into two categories: Fixed Cost and Variable Cost.

The break up of fixed and variable cost:

Fixed Cost:

I. Salaries and wages

II. Repairs and MaintenanceIII. Administration and Misc Expenses

IV. Fixed portion of selling expenses

V. Fixed Royalty and know how payments

VI. Interest on Term Debt

VII. Depreciation on straight line basis.

Variable Cost:

I. Raw materials

II. Consumable Stores and spares

III. Packing material

IV. Power fuel and water

V. Royalty payments linked to sales

VI. Variable selling expenses

VII. Interest on working capital


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VIII. Other variable expenses varying directly in proportion to output.

Break Even Point: = Fixed CostContribution

Contribution: Difference between sale price and variable cost is called contribution. Thecontribution helps a unit to recover its fixed cost. The level of production at which thecontribution recovers entire fixed cost is called break even point.

Fixed Cost Rs. 6000.00Sale Price Rs. 12 per unitVariable Cost Rs. 6

Break even Point = Fixed Cost = 6000 =1000Sale Price Variable Cost 12-6

The break even point will be at 1000 units, the contribution of Rs. 6 per unit will recover the entire cost of Rs. 6,000 at the production of 1000 units.

Break even point can be expressed in terms of :

1) Volume of production : BEP is multiplied by volume of production

2) A percentage of installed capacity : BEP is multiplied by % age of capacityutilisation

3) Amount of sales.: BEP is multiplied by sales realization .

Internal Rate of Return

Internal Rate of Return (IRR) is that rate of discount which would equate the present value of investments (Cash Outflows) to the present value of benefits( Cash in flows) over the life period of the project.

IRR can not be determined by just looking at the cash flows. It is calculated bytrial and error method. Various discounting rates are applied to the net presentcash flows until a rate is found that reduces the net present value to zero.


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Management Analysis

A project which is considered technically feasible, economically viable and financiallysound may run into difficulties if it is not backed by sound and efficient management.

Man behind the project is very important. Experience shows that may of the projects have been rendered sick owing to inefficient or dishonest management. Therefore , proper evaluation of management is a highly essential part of appraisal

1. Qualities of an entrepreneur

I. Honesty and Integrity II. Involvement in the project

III. Financial Resources IV. Competence

V. Initiative

VI. IntelligenceVII. Drive & Energy

VIII. Self confidence IX. Frankness X. Patience

2. Various forms of organization.

II. Proprietary Concern I. Partnership firm

III. Corporate Sector


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Qualities of Entrepreneur

Each promoter has to come in contact with the appraising officer several times for discussionregarding the project. Appraising officer should evaluate the qualities of the promoter after interviewing him two three times.

A check list giving 10 qualities of an entrepreneur is given below to judge promoter of a project.Although the same is highly subjective , it gives and idea about the qualities of the promoters.

Excellent Good Poor(20) (12) (4)

1 Character Honest and keep itsword under allcircumstances

Makes sincere effortsto honour his words

Does not bother muchto honour his words

2 Involvementin the project

Highly Involved Only source of Income

Has other source of Income

Does as part timeactivities

3 FinancialResources

Has enough financialresources to meet notonly the requirementof promoterscontribution but alsoto finance smalloverrun in the projectcost

Has sufficientfinancial resources tomeet the requirementof promoterscontribution

May have to borrowto meet therequirement of

promoterscontribution

4 Competence Has knowledge and experience relating tothe project.

Has knowledge orexperience relating tothe project.

Has neither experience nor knowledge relating tothe project.

Excellent Good Poor(10) (6) (2)

5 Initiative Highly alert toopportunities

Performs work with just the generalguidance

Routine worker,awaits decisions

6 Intelligence Very quick inunderstanding

pertinent points of a problem

Understand the problem after reasonableexplanation

Takes time tounderstand theimplications of anyaction


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7 Drive &Energy

Always highlyenergetic

Fairly Energetic Avoids Hard work

8 Self Confidence

Believes strongly inhimself and hisabilities

Has faith in hisabilities

Believes in luck

9 Frankness Talks frankly aboutthe weak points of the

project

Prepared to talk onweak points of the

project

Avoids talking onweak points of the

project10 Patience Has patience and does

not expect quick results

Appreciates the timetaken by lendinginstitutions inappraisal

Wants quick results.

Monitoring:

Term Loan component in the total advances ( As per Schedule 9 of the balance sheet )

has been at 51.17 % as on 31.03.2007

Commitment charges of 1% applicable on undrawn portion of Term Loan. (LAC 80dtd. 11.07.2007 )

End use of Funds in borrowal accounts

Verification of the end use of funds is a basic requirement in lending. As per the Banksguidelines, the end use of funds has to be ensured in all cases. The Central StatutoryAuditors in their preliminary audit reports for the year 2006-07 have pointed out that inseveral cases branches are relying upon Chartered Accountant Certificates in ensuring

end use of funds in borrowal accounts. It is also observed that in some cases, particularlyTerm Loans, the disbursements were made to the credit of borrowers Current Accountinstead of direct payment to the suppliers.

In this regard, branches are advised to ensure that disbursement in borrowal accounts ismade strictly as per the terms of the sanction as per the Banks extant guidelines. ThoughChartered Accountant Certificate helps in assessing the end use of funds but in any case itdoes not dispense with our own assessment for confirming end use of the funds lentunless specifically provided in the sanction. Similarly, disbursement of Term Loansthrough current account should be avoided as far as possible as it is difficult to track enduse of funds in such cases.

2. Monitoring of Industrial Projects under implementation

In terms of RBI guidelines on income recognition, asset classification and provisioningon advances, the date of completion of the project should be clearly spelt out at the timeof financial closure of the project. In such cases, if the date of commencement of commercial production extends beyond a period of 6 months after the completion of the


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project as originally envisaged at the time of initial financial closure of the project, theaccount should be treated as Sub-standard Asset.

In view of the above guidelines, there is a need to decide the date of commencement of commercial production very discretely and realistically. At the time of financial closure,

date of implementation of the project/commencement of commercial productionenvisaged initially should be reviewed afresh and final decision should be taken anddocumented under intimation to sanctioning authority. It is also important to monitor the

progress of the project under implementation on an ongoing basis to ensurecommencement of commercial production in time and as per the schedule approved at thetime of financial closure/sanction.

Exercise for Break even point:

Installed Capacity : 80 lakhs jewelsCapacity utilization: 93.75% ( III rd year of operation)

Production : 75 Lakhs Jewels

Sales Realisation: Rs. 41.25 Lakhs.

The Cost of production:

Particualrs Rs/Lakhs

Raw material 5.25Consumable Stores 4.50Power fuel water etc 1.15

Repairs and maintenance 0.75Wages and Salaries 4.86Selling Expenses 1.50Interest on working Capital 0.95Rent Insurance etc 0.75Depreciation 2.92Administrative Expenses 1.30Interest on Term Loan 3.13Total 27.06

Calculate BEP in terms of

volume of production

% age of Installed Utilization

Amount of Sales


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A. Variable Cost:

Particulars Rs/

LakhsRaw material 5.25Consumable Stores 4.50Power fuel water etc 1.15Selling Expenses 1.50Interest on working Capital 0.95Total 13.35

B Fixed Cost:

Particulars Rs/

LakhsRepairs and maintenance 0.75Wages and Salaries 4.86Rent Insurance etc 0.75Depreciation 2.92Administrative Expenses 1.30Interest onTerm Loan 3.13Total 13.71

C. Sales Realisation : 41.25

D. Contribution : (C A) 27.90

BEP Production = Fixed Cost X Production = 13.71 X 75 Lakhs jewels Contribution 27.90

= 36.85 lakhs Jewels


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BEP % age of Capacity = Fixed Cost X Capacity UtilisedContribution

= 13.71 X 93.75 = 46.07 % of installed capacity27.90

BEP % age of Capacity = Fixed Cost X SalesContribution

= 13.71 X 41.25 = 20.27 Lakhs27.90


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