4.1.4.2 Production costs

Investment and fixed costs

Saroneem Biopesticides Ltd has rented a plot of land and a building, including the technical equipment, from ICIPE. The company has to pay for any maintenance and investments in new equipment. This is important for an economic evaluation since Saroneem Biopesticides Ltd did not have to pay the costs of land and building etc but has to take into consideration the depreciation of the old equipment. The present value of the buildings, including installations and the land is approx. KSH 5,000,000. Although the value of the buildings is of little interest, since no depreciation take place, their estimated value is provided for information.

Table 13 provides information about items of capital expenditure, technical equipment, specifications, cost of purchase and present value including the annual depreciation.

In Kenya it is customary (and also required by the tax laws) to depreciate the cost of investment items by 25% p.a, in a degressive way. This leads to the fact that at the beginning of the utilisation period high depreciation costs have to be considered, which decrease in the course of time. This calculation method was also applied here. The above listed packing machine for neem powder is not in use and therefore not considered in the depreciation.

Table 13: Technical equipment and its value

Equipment	Capacity	Cost of investment (KSH)	Actual value (KSH)	Actual depreciation	Life-time (years)*
Shell breaker	20	30,000	7,000	1,750	8
Wind-separator	200	5,000	2,100	525	8
Oil expeller DD 85 G 40	40	450,000	300,000	75,000	8
Hammer mill and mixer	85	220,000	90,000	55,000	8
Packing machine	200	200,000	100,000	25,000	8
Extraction plant	**	150,000	80,000	-	8
Large scale		45,000	20,000	5,000	8
Small scale		60,000	40,000	10,000	12
Bottling plant for small bottles		13,500	8,000	2,000	12
Bottles/h	200	1,500	800	200	8
Total depreciation				174,475

* purchase of new goods
** 360 kg per day

With the exception of the two oil expellers, all investment goods are locally produced. The oil expellers were bought second-hand in Kenya. The quality standards of the technical equipment fulfil the market requirements. The prices listed in Table 14 include the costs of transport and installation.

The following table presents the calculated fixed costs of Saroneem Biopesticides Ltd for 1999/2000.

Table 14: Fixed costs of the neem-processing plant in Kenya

Position	Fixed cost per year (KSH)
Depreciation of the building	0
Maintenance of the building	0
Depreciation of machinery and equipment	174,475
Rent	120,000
Full-time staff	342,000
Inssurances	30,000
Membership fee	0*
Cost for analysis	150,000
Total fixed costs	696,475

* Membership costs were covered up to and including 1999 by Saroc Ltd and are not a specific liability of Saroneem Biopesticides Ltd.

The most important item of the fixed costs is the full-time staff, at 49% of the total costs.

Variable costs

Table 15 provides information on the calculated variable costs of Saroneem Biopesticides Ltd for the period 1999/2000.

Table 15: Variable costs of the neem-processing wing of Saroc Ltd.

Item	Amount	Unit price (KSH)	Total price (KSH)
Raw material	31 148 kg	30	934,440
Part-time staff	3 LF, 8 months	250	138,000
Water			0
			0
Maintenance, machinery & equipment			190,000
Transport costs			50,000
Alcohol	6,300 l	50	315,000
Emulsifier	500 l	200	100,000
1 l plastic bottles	10,000 pc	12	12,000
20 ml plastic bottles	3,000 pc	4	12,000
Cardboard packing	850 pc	20	17,000
Labels	10,000	4	40,000
Paper bags	20,000 pc	5	100,000
	1,250	25	31,250
	100	50	5,000
Product development			75,000
Advertising			40,000
Administration & stationery (including telephone, postage, etc.), bottling; transport from the plant			250,000
Interest on variable costs	16% PA for 6 months		193,415
Total variable costs			2,611,105

Discussion of the costs listed above:

Detailed consideration and interpretation of each cost item reveals that there is no potential for rationalisation, in either the fixed costs or the variable costs.

The items where a potential for rationalisation usually exists are discussed below.

Fixed costs:

The permanent employees are necessary for production.

Both "marketing" and "sales" are underdeveloped due to a lack of personnel, and would actually require more staff.

The other fixed costs cannot be reduced; in the case of "building" and "rent" they are already lower than the usual market price.

Variable costs:

The flexibility of the part-time staff to be employed only when work is available does not give any leeway for rationalisation.

The investments in advertising and product development are at a very low level. Especially in this area it would be advisable to intensify the activities. However, this would increase the variable costs.

It should be emphasised that it was not easy to allocate all the costs to a specific item, for example a non-quantifiable portion of the transport and the running costs is actually part of the advertising and product development costs. Also, the operational costs of Saroneem Biopesticides Ltd were partly covered by the non-neem-manufacturing wing of Saroc.

The interest rate referring to a six-month period is line with the market conditions and cannot be reduced. The other costs are required to keep production running and cannot be reduced either.

Production cost per unit (l/kg or 1000 l/t)

The following table presents a cost breakdown for the specific costs of one product unit.

Table 16:

Costs	Amount	Production cost (KSH)
Raw materials	1 t	30,000
Alcohol	500 l	25,000
Emulsifier	25 l	5,000
1 l plastic bottles	500 pc	6,000
Cardboard packing	42 pc	840
Labels	500 pc	2,000
Neem oil	162 l	9,120
Labour and other costs		9,500
Distribution, advertising		3,000

Production costs of 500 l Neemroc		KSH 90,460
Production costs of 1000 l Neemroc		KSH 180,920
Production costs of 1 l Neemroc		KSH 181
Contribution to covering the fixed costs and the profit of the company
for 1 l Neemroc
	retail price	KSH 219
	wholesale price	KSH 149

Table 17 shows the production costs of 730 kg Neemros.

The production costs of 1 l neem oil are KSH 60. 120 kg neem oil has a value of KSH 7200. Since this neem oil is further processed within the company, it reduces the costs of the raw material. The value for the raw material is therefore subtracted from the cost of the raw material. The costs of KSH 22 800 have to be calculated for the interim products such as 639 kg of neem cake and 100 kg neem shells.

Table 17: Production costs of Neemros:

Cost item	Amount	Production costs (KSH)
Raw material	1 t	30,000
Neem cake & shells	730 kg	22,800
Paper bags	3,000 pc*	15,000
Cardboard packing	108 pc	2,160
Labour and other costs		29,000
Distribution & advertising		5,000

* Based on selling the total amount in 250 g paper bags. If the product is sold in greater units e.g. 2 kg, 25 kg, the costs of packing are reduced.

Production costs of 730 kg Neemros	KSH	73,960
Production costs of 1 t Neemros	KSH	101,315
Production cost of 1 kg Neemros	KSH	101
Contribution to covering the fixed costs and profit:
Expectation of the company for 1 kg Neemros is
- considering the retail price	KSH	99
- considering the wholesale price	KSH	59

The next table provides details on the production costs for 1000 l Neemsar "O".

Table 18: Costs of production of Neemsar "O"

Cost item	Amount	Production costs (KSH)
Neem oil	1,000 l	60,000
20 ml plastic bottles	50,000	200,000
Labour and other costs		15,000
Distribution & advertising		3,000

Costs of production of 1000 l Neemsar "O"		KSH 278,000
Cost of production of 1 l Neemsar "O"		KSH 278
Contribution to covering the fixed costs and profit of the company:
from 1 l Neemsar "O"
	- considering the retail price	KSH 322
	- considering the wholesale price	KSH 222

External costs

No external costs such as environmental damage are caused by the neem-processing plant.

Cash flow

Below is a calculation the cash flow of Saroneem Biopesticides Ltd in 1999.

From the raw material purchased the following products were manufactured:

· 10000 l Neemroc
· 10000 kg Neemros
· 60 l Neemsar "O".

This has to be multiplied by the specific wholesale or retail price.

Table 19: Calculated cash flow of Saroneem Biopesticides Ltd (with non-representative cost factors eliminated):

Position	KSH
Income: total income	5,261,800
Costs:
- variable costs	2,721,265
profit	2,540,535
+ interest on variable costs	201,575
- fixed costs	816,475
Profit (before tax)	1,925,635
+ depreciation	174,475
Cash flow	2,100,110

It is assumed that the entire production will be sold. Since most of the production will be purchased by large companies at wholesale prices (as in the past), a ratio of 30% retail prices to 70% wholesale prices is calculated.

This calculation shows that even with consideration of the representative market costs the neem plant in Kenya is a profitable business.

It should be taken into consideration that a range of further products can be developed and sold based on the present products (see section 3.1.6.4 below)

For example, it is known that extracted neem cake still contains nutrients and other active ingredients which show a positive impact on plant growth. This could be sold as a by-product of the insecticide production. To develop this product line it would require other marketing activities by Saroneem Biopesticides. The target group for this organic fertiliser would be small farmers growing vegetables. The retail price for 1 kg of extract neem cake could be about KSH 10.

This product alone would increase the cash flow and subsequently the profit by at least KSH 50000.