4.2.5.2 Production costs

Investment costs

The investment required for establishing a small-scale neem industry is not high. Investment items are land, preparation of land, water supply, buildings and machinery for neem processing.

Land. The Thai Neem Products Company Ltd is using a 1600 sq m (1 rai) plot for manufacturing which are part of a 10 rai pomelo plantation. The current price of land in Suphan Buri Province is about 300,000 to 400,000 baht per rai (Table 2.10). If unpaved land is bought, the preparation of the land also has be considered, which will cost about 200,000 baht per rai.

The rent of land is rather cheap, at about 10,000 baht per rai per year.

Water and energy supply. Thai Neem Products Company has built a well as the main source of water. The total investment was about 100,000 baht for the motor and the pipes. The well supplies the whole plant with water.

Electricity is locally available.

Buildings. The buildings the Thai Neem Products Company use for neem production are quite simple. The owner has designed everything himself. About 500,000 baht was invested in the buildings. Most of the residential parts were converted to industrial uses or have multiple uses. The cold store was built at an investment cost of 300,000 baht.

Machinery. Several machines such as those for stirring, grinding, sealing, mixing, seed screening, pellet pressing, and closing bottle had to be bought for neem processing. The most expensive machine is the vacuum evaporator, costing about 700,000 baht. The investment costs of each machine are listed in Table 32.

Fixed costs

The fixed costs comprise depreciation, maintenance costs and interest paid.

Depreciation. Depreciation is calculated by the strength line method. The initial price minus the salvage value gives a value which is divided by the effective life-time, to give the depreciation per year. Based on this calculation, the depreciation equals 122,034 baht per year (see Table 33).

Maintenance costs. Maintenance costs are considered as one component of the fixed costs, since the machinery needs to be kept in good working order, whether the business is operating or not. The maintenance costs per year of the Thai Neem Products Company total 47,500 baht.

Interest paid. Interest of about 48,000 baht per year has been paid.

The total fixed costs of the Thai Neem Products Company are about 217,534 baht per year.

Table 32: Investment items of the Thai Neem Products Company Limited

Items	Amount and unit	Price per unit (baht)	Production capacity (kg or litre/unit)	Salvage value (baht/unit)	Usable time (years)
Land	1 rai14	350,000
Land preparation	1 rai (1600 sq m)	200,000
Deep well	1 well	100,000
Building	1 building	500,000
Cold store	1 room	300,000	70 t		15
Stirring tanks type 1	3 pcs	20,000	25 l/h	0	15
Stirring tanks type 2	2 pcs	75,000	25 l/h	0	15
Vacuum evaporator	1 set	700,000	40 l/h	2,000	15
Grinder	2 machines	40,000	100 kg/h	2,000	15
Sealing machine	3 machines	2,000		0	10
Mixing machine	1 machine	20,000	600 kg/h	1,000	15
Seed-screening machine	1 machine	10,000		1,000	15
Pellet-pressing machine	1 machine	20,000	400 kg/day	1,000	15
Plastic containers	10 tanks	450	200 I	0	5
Bottle closer	2 machines	60,000	30 l/h	1,000	10
Lifting car	1 car	100,000		30,000	15
Truck	1 car	400,000		10,000	23

¹⁴ 6.25 rai equals 1 ha.

Table 33: Depreciation and maintenance costs at the Thai Neem Products Company Limited

Items	Amount	Depreciation (baht/year)	Maintenance costs (baht/year)
Deep well	1	3,333	0
Building	1	16,667	0
Freezer	1 room	20,000	10,000
Stirring tanks type 1	3 pcs	4,000	1,500
Stirring tanks type 2	2 pcs	10,000	1,500
Evaporator machine	1 machine	46,533	5,000
Grinder	2 machines	5,067	0
Sealing machine	3 machines	600	1,500
Mixing machine	1 machine	1,267	2,000
Seed-screening machine	1 machine	600	0
Pellet-pressing machine	1 machine	1,267	5,000
Plastic containers	10 tanks	900	0
Bottle closer	2 machines	11,800	0
Lifting car	1 car	0	1,000
Truck	1 truck	0	20,000
Total		122,034	47,500

The Thai Neem Products Company Ltd pays interest of 48000 baht/year, which forms part of the fixed costs.

Operating or variable costs

Operating or variable costs are those arising when the business is in operation. They include labour, materials, packaging, electricity, communication, marketing, transportation and other costs, as well as sales tax. They are described below.

Costs of materials. The main variable cost is that of the raw material and accounts for 43% of the total variable costs. It requires high liquidity during May and June. The supply of raw material fluctuates from year to year depending on the climatic conditions, e.g. in 1998 neem seeds were abundant while in 1999, due to heavy rains, there was a shortage of seeds. This is one reason why the costs of raw materials vary each year (see Table 34). The prices of dried neem seeds and dried neem fruits are about 15 and 5 baht per kg respectively (Table 26). The total material costs come to 1,034,700 baht per year.

Table 34: Costs of raw materials purchased by the Thai Neem Products Company Limited

Year	Raw materials purchased	Quantity (tonnes)	Total raw material costs (baht/year)
1994	Dried neem fruits	30	150,000
1995	Dried neem fruits	100
	Neem seeds	20	800,000
1996	Dried neem fruits	150
	Neem seeds	50	1,500,000
1997	Dried neem fruits	30
	Neem seeds	50	900,000
1998	Dried neem fruits	150
	Neem seeds	60	1,650,000
1999*	Dried neem fruits	5
	Neem seeds	50
	Neem oil	1,000 litre	825,000

Note: *Data for the year 1999 are estimated.

Labour costs. Like most small-scale industries in Thailand, the Thai Neem Products Company is operated as a family business. The manager, assistant manager the supervisor, two accountants and one driver are employed and receive a fixed salary per month. Labourers are hired on a daily basis and no permanent labourers are employed. The temporary labourers receive about 125 baht per day. This means that the total labour costs per year run to 781,000 baht, which makes up about 30% of the total variable costs.

Packaging costs. The costs for each package are estimated based on the material used: cotton bags, plastic bags, plastic bottles, glass bottles, labels etc. For example, the estimated packaging costs of 1 litre neem extract amount to 13 baht. Total packaging costs vary with the amounts sold. In 1999 they were estimated to be about 155,977 baht.

Marketing costs. Marketing promotion is done through advertising in print. Each month the company spends about 10,000 baht on advertising these products in agricultural journals.

Electricity costs. Electricity is the main source of energy. All the company's machines use electricity. The estimated annual costs of electricity are about 180,000 baht, which accounts for 7 per cent of the total variable costs.

Communication costs. Fax and telephone costs are estimated to come to 5,000 baht per month.

Transportation costs. These include car and truck rentals. It is assumed that if the business is not operating, there is no need to rent a car. Petrol is the main fuel used for transportation of most products to the market. However, the transportation costs of dried neem fruit powder that sent to the Department of Agricultural Extension are paid based on the weight (in kg) of products sold. Total transportation costs are about 144,500 baht per year.

Table 35: Estimated variable costs of the Thai Neem Products Company Limited in the production year 1999

Items of variable costs	Unit	Price (baht/unit)	Amount (unit)	Variable costs (baht/year)	%
Labour costs: 1 evaporator controller, 4 hired labourers (daily wage); the manager, assistant manager the supervisor, two accountants and one driver				781,000	30
Costs of materials				1,034,700	40
- Dried neem fruits, neem seeds, neem oil				825,000
- Methanol	litre	15	13,000	195,000
- Other substances	litre	70	210	14,700
Packaging costs for Neem-ma and dried fruit powder				155,977	6
Marketing costs, advertising				120,000	5
Electricity costs				180,000	7
Communication costs				60,000	2
Transportation costs				144,500	6
- Truck, car rental, petrol; transportation costs for neem bags	month	3,000	12	36,000
Other operating costs: seed drying, sales taxes				126,836	5
Total				2,603,013	100

Other operating costs. Since the company does not own a seed dryer it had to pay for drying the seed. However, the Thai Neem Products Company has already invested in the installation of a dryer, which will soon be working. The other operating cost is the sales tax. Due to the economic crisis in Thailand, the Thai government has levied a sales tax of 5%. However, based on negotiation, the company can reduce the sales tax to 3%. In addition, products that are sold to the Department of Agricultural Extension are subjected to a sales tax of only 1%.

External costs

Based on the interview and observations, it seems that there are no external costs or environmental damage from the Thai Neem Products company. Nearly everything is recycled and all by-products of neem processing are used.

Cash flow

Break-even yield. Based on the calculation, the minimum production required to cover the variable costs, so that the company can survive and continue the business, is about 11,183 litre per year of neem extract. If we assume 300 working days a year, at least 47 litres per day of neem extract are needed to reach a profitable level (see Table 36).

Break-even point of operating days. With the current production capacity of 60 litres per day, at least 186 days of production per year are required to generate enough revenue to pay the costs.

Break-even price. The minimum price that will cover the costs is about 252 baht per litre (see Table 36). It implies that with the increasing production or a reduction of the costs for the raw material, which is main item of total costs, the price of the product can be set lower.

Table 36: Results of a break-even analysis

Items	Unit	Break-even point
Break-even yield	Litres of neem extract/year	11,183
	Litres of neem extract/day (assuming 300 operating days a year)	47
Break-even point of operating day	days/year (assuming current production capacity of 60 litres/day)	186
Break-even price	baht/litre	252