Break-Even Caluculation For Spinning Mill
Break-Even Caluculation For Spinning Mill
Break-Even Caluculation For Spinning Mill
Introduction
It is a known fact that the profit margin in a spinning mill, under normal
trading conditions, is on the average not higher than 2% to 4% of the
sales turnover. A combination of factors – operational as well as
commercial, governs the profitability of a spinning mill, some of which
vary with volume of production. Among the various factors that influence
the conversion cost of fibre to yarn, ring frame utilisation is perhaps the
most important. This is because not only a high spindle utilisation leads
to a reduction per unit production in every item of conversion costs –
overheads, depreciation, interest, stores, power and wages – but also
increases profits consequent to the higher volume of production and
sales turnover. The ring frame utilisation is affected by a number of
factors, more particularly workers shortage, power shortage, mechanical
/ electrical repairs, adverse trading conditions etc.
1
Break-even point
Where,
2
Table 1 Count-wise cost of production and profits (Rs/spindle/year)
Operating profit
(A - B1 to B7) 2033 1472 1310 1409 1376 1215
3
Table 2 Assumptions made to estimate count-wise cost of production
Other assumptions
4
ix) Overheads, interest and depreciation costs
(all values are expressed as % of sales)
Total overheads 4 4 5 7 8 8
Interest cost 5 5 6 6 7 7
Depreciation cost 3 3 3 4 4 4
(Table 3). The break-even point utilisation ranges from 79% in 100s to
85% in 20s counts. In other words, when the utilisation falls below
these levels, the mills would incur net losses. This underlines the
utilisation at high levels mills have to use captive power. The extent of
imposed.
5
Table 3 Break-even point utilisation
Amount (Rs/spl./year)
Particulars 20s 30s 40s 60s C 80sC 100sC
1. Sales turnover 21115 14804 11521 10649 9142 7736
2. Variable cost
a) Raw material cost 14077 9310 6598 5698 4501 3588
b) Wages cost (variable component) 591 403 298 249 198 161
c) Power cost (variable component) 1868 1617 1530 1438 1325 1207
d) Stores cost (50%) 175 175 150 150 140 140
e) Packing materials cost 377 229 157 102 70 49
f ) Interest cost on working capital 528 370 346 319 320 271
g) Selling expenses 211 148 173 213 183 155
Total variable cost 17827 12252 9252 8169 6737 5571
3. Contribution [ (1) - (2)] 3288 2552 2269 2480 2405 2165
4. Fixed cost
a) Wages cost (fixed component) 512 408 342 313 284 259
b)Power cost (fixed component) 304 263 250 234 216 197
c) Overheads 633 444 403 532 549 464
d) Stores cost (50%) 175 175 150 150 140 140
e) Interest cost on term loans 528 370 345 320 320 270
f) Depreciation cost 633 444 346 426 366 309
g) Salaries cost 160 160 160 160 160 160
Total fixed cost 2945 2264 1996 2135 2035 1799
5. Break-even point utilisation (%) 85 84 84 82 80 79
6.Cash break-even point utilisation (%) 67 68 69 65 66 65
of 141 participant mills, about 80% have diesel gensets. As high as 40%
the average, is about 3.3 per litre of diesel oil. However, the high cost of
Average cost per unit of power generated from the diesel gensets is
more than 2 times the average EB power cost per unit. In the event of
mills utilising the diesel gensets, the overall power cost per unit would
increase significantly.
6
The impact of high power cost per unit on profits and break-
even point utilisation has been worked out for the 6 popular counts, for
which the cost of production has been furnished in Table 1 and the
details are given in Table 4.
Table 4 Impact of power cost on profits and break-even point utilisation
Mill size : 30000 spindles
Particulars 20s 30s 40s 60sC 80sC 100sC
Avg. power cost - Rs 4 per unit
Net profit (Rs in lakhs / year) 103 86 82 103 111 110
Break-even point utilisation(%) 85 84 84 82 80 79
7
spindle mill manufacturing 40s count the expected net profit will be Rs
82 lakhs per year and the break-even point utilisation will be 84%. When
the power cost increased to Rs 4.20 / unit (ie 5% increase) there will be
a drop in the net profit by about Rs 27 lakhs per year while the break-
even point utilisation will be high at 87%.
It can also be seen from Table 4 that, for the set of working
conditions assumed in Tables 1 and 2, when the increase in power cost
per unit exceeds 20%, the spindle utilisation required to break-even will
be more than 100% which is impracticable in the spinning industry.
Normally spinning mills can maintain the spindle utilisation up to 98%
consistently. Therefore, Table 4 implies that the mills must take all efforts
towards maintaining the power cost at optimum level.
Conservation of energy is one of the means to reduce the power
cost to some extent. Energy auditing is the first step in all energy
conservation programmes in order to investigate and quantify the
potential areas of energy saving. Mills must initiate measures to conserve
energy by way of reducing energy loss in electrical system, modifications
in manufacturing machines and optimising energy consumption of
ancillary or supporting system. SITRA has been conducting energy audits
for textile mills in India and abroad for more than two decades. Over 300
audits have been conducted so far. Mills can utilise the services of SITRA
in this area.
Author:
D.Shanmuganandam
(Liaison & Consultation Division)