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Economics of Dairy Products: A Case Study

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DOI: 10.9734/bpi/cabef/v5/3900E

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 Chapter 6
Print ISBN: 978-93-5547-813-9, eBook ISBN: 978-93-5547-814-6

Economics of Dairy Products: A Case

Study

G. N. Narnaware a* and Devendra Kumar Kurrey b

DOI: 10.9734/bpi/cabef/v5/3900E

ABSTRACT

The present study optimize the cost of dairy products in manufacturing in a dairy
plant so that consumers should get benefitted from the price of respective
product sales in the market. Additionally, this study helps to reduce the handling
and operational losses of the dairy plant. The study was undertaken in the
Experimental Dairy Plant, National Dairy Research Institute, Karnal (Haryana),
with a handling capacity of ten thousand liters per day, to optimize the cost of
Dairy products manufactured in the dairy plant. Burfi and Ice-cream are among
the most crucial Indian dairy products processed in a dairy plant and widely
consumed. Primary and Secondary data were both used to conduct this study.
Primary observations and interviews with plant employees round out the primary
data. Secondary data, such as milk inflow, its usage pattern, and product output,
were gathered from various plant ledgers. To reduce the cost of each ingredient
used to make Burfi and ice cream, an economic study of this dairy product in a
dairy plant is required. The dairy product will keep its presence in the competitive
market, and as a result, the consumer will benefit from this optimum price.
Therefore, calculated the product cost was in a dairy plant, and the fixed and
variable cost was 24.56 and 75.44 percent for Burfi and 34.01 and 65.99 percent
for ice cream, respectively. This study shows that the dairy plant has surplus
production of 3721.69 kg and 1,02,082.33 cups of 100 ml of output Burfi and Ice-
cream, respectively, after the break-even point. This study suggests that the
small milk producer and self-help groups should engage in value-added product
processing on their own by taking training from institutions to generate income
and employment to support the rural economy.

Keywords: Burfi; ice cream; milk product dairy cost; production cost.

1. INTRODUCTION
Since 1992, India is the largest milk producing country contributing 23 percent of
world milk production. India’s milk production in 2020-21 reached to 210 million
________________________________________________________________________
a
Department of Dairy Business Management, College of Dairy Technology, Warud (Pusad), District -
Yavatmal, Maharashtra Animal and Fishery Sciences University, Nagpur, India.
b
Indira Gandhi Krishi Vishwavidyalaya, Raipur, India.
*Corresponding author: E-mail: [email protected];
 Current Aspects in Business, Economics and Finance Vol. 5
Economics of Dairy Products: A Case Study

tones with compound annual growth rate of about 6.2 percent (Economic Survey
2021-22). Among the the agricultural commodity dairy is the single largest
commodity contributing 5 percent of the national economy. Dairy industry
generates more than eight crore employments for farmers directly and indirectly.
Between 1997 and 2020–21, the per capita availability significantly increased,
from 197 gm to 427 gm. Due to rapid change in lifestyle vis-a-vis food habits and
more significant influence on them will divert more expenditure towards milk and
milk products. Because of the high cost of processing, the benefits are reduced
for producers and consumers. Despite tremendous growth and opportunities in
dairy industries, it proves that income and employment can provide by dairying
entrepreneurship only after the COVID-19 pandemic. Very few studies were
conducted [1-6]. A recent study by Ajmer Singh and Chavhan [7] on the
cooperative dairy in the state of Haryana. Despite these results, dairy plant
analysis is still frequently required. All social classes consume the well-known
dairy products burfi and ice cream. In order to maintain the balance between
producer and customer interests, it is crucial in the dairy business to determine
the cost of Burfi and ice cream when setting product prices.

2. OBJECTIVES OF THE STUDY

The aim of the study is to optimize the cost of dairy products in manufacturing in
a dairy plant so that consumers should get benefitted from the price of respective
product sales in the market. Additionally, this study helps to reduce the handling
and operational losses of the dairy plant.

3. MATERIALS AND METHODS

The present study was conducted at the experimental dairy, National Dairy
Research Institute, Karnal. The secondary data was collected for the year 2001-
2002 from the different sections of the dairy plant. The present study has been
aimed at carrying out the cost of processing and manufacturing various dairy
products in an Experimental Dairy Plant, National Dairy Research Institute,
Karnal (Haryana). The secondary data were collected from the records
maintained in the dairy plant for 2000-2001. These were supplemented by actual
observation and interviewing plant personnel. Data on milk inflow, its utilization
pattern and product output was taken from different plant ledgers where entries
were made. The quantity of raw materials and the price of the items used for
production were drawn from the records of the store section. Separate records
are maintained for the steam boiler. The information on wages and salaries of the
person employed was taken from the official records of the plant. Actual
observations were taken on the quantity of water utilized by the plant,
temperature of different stages of production, the quantity of steam required for
the manufacturing of the product, and electric power utilization was calculated
based on the horsepower of motors (kW) installed on different types of
machinery and equipment, and running capacities of the equipment and
machinery. The cost of electricity and steam was calculated by the following:

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 Current Aspects in Business, Economics and Finance Vol. 5
Economics of Dairy Products: A Case Study

Electricity cost: Using an electric motor with each machine is the way to
allocate the electricity expenditure on a different process or product
manufactured. However, meters were not provided for each machine in the plant
under study. Therefore, the expenditure on electricity was apportioned in the
study using a horsepower hours basis. The following formula calculated
horsepower hours:
Expenditure on electricity/unit (kw) = No. of horse power x No. of hours X per
unit price.
Steam Cost: The steam cost included expenditure on depreciation of boiler,
building, labour, supervision of office, fuel, water, store maintenance, electricity,
maintenance, and consumable utensils. The total expenditure on steam was
calculated on different process products on the basis of the quantity of steam
used. Quantities of steam required by different products were calculated by
taking actual observation and using the following formula suggested by Ahmed, T
[8],
Total heat required to heat milk(Kcal) = (Quantity of milk x Specific heat x
Temperature changes) / Efficiency
Net heat utilized to heat milk (Kcal) = (h x XL) –Total heat condensate
Where,
H = Sensible heat (Kcal/Kg)
X = Wet steam quantity in percent, and
L = Latent heat
Steam required to heat milk(kg) = (Total heat required to heat milk (Kcal)) / (Net
steam utilized to heat milk (Kcal/kg).
Break-even output (BEP): BEP = Total fixed cost for the product / (Price -
Average variable cost).
To work out the cost of production of butter and ghee, the tabular analysis
technique was used to work out different cost components of butter and ghee
component-wise cost method by Singh R. and Kalra et al. [1].
4. RESULTS AND DISCUSSION
Burfi contributed 2.27 percent share in the total revenue of the dairy. During the
study period, 4906 kg Burfi was manufactured incurring fixed cost of 24.56
percent and variable cost 75.44 percent. Average cost incurred on manufacturing
of Burfi was Rs.26.82 per 500gm.Component-wise cost analysis revealed that
the raw material alone constituted 62.36 percent, followed by administration and
supervision 9.99 percent. Expenditure on packaging was Rs.2.5 per 500 gm of
Burfi. Depreciation on equipments like condensing plant, Khoa kettle and space
occupied by these equipments in building was 7.79 percent and labour
expenditure was 5.19 percent were in line with findings of Singh et al.[1]; Ripi
Dhoni et al. [2]; Rakesh, et al. [3], A. Shalini, et al. [4]; Mir Miraj Alli et al. [5]; Amit
Thakur, et al. [6]; Narnaware, et al. [9].

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 Current Aspects in Business, Economics and Finance Vol. 5
Economics of Dairy Products: A Case Study

Table 1. Component wise cost of burfi

Sr. Cost component Total Cost (Rs.) Fixed Cost Variable Cost Total Cost per unit Percent
No. (Rs.) (Rs.) (Rs./500gm) Cost
1 Raw material 164076.26 -- 164076.26 16.72 62.36
2 Labour 13644.00 13644.00 -- 1.39 5.19
3 Electricity 1835.16 -- 1835.16 0.19 0.70
4 Water 233.33 -- 233.33 0.03 0.09
5 Steam 5066.31 116.52 4949.79 0.52 1.93
6 Refrigeration 1205.65 103.92 1101.73 0.13 0.46
7 Administration and 26278.20 26278.20 -- 2.68 9.99
Supervision
8 Store maintenance 3328.77 3328.77 -- 0.34 1.27
9 Quality Control 1715.00 649.13 1065.87 0.18 0.65
10 Packaging 24530.00 -- 24530.00 2.50 9.32
11 Depreciation on 20500.00 20500.00 -- 1.48 7.79
equipments and
building
12 Sundries --- 700.00 0.07 0.64
Total Cost 64620.54 198492.14 26.82 100
Per unit cost 26.82 6.59 20.23
(Rs./500gm) (100.00) (24.56) (75.44)
Figure in parenthesis are the percentage of total cost; Total production in a year = 9812 Packs/500gm

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 Current Aspects in Business, Economics and Finance Vol. 5
Economics of Dairy Products: A Case Study

Table 2. Componentwise cost of ice-cream

Sr. Cost component Total Cost Fixed Variable Cost (Rs.) Total Cost Percentage
No. (Rs.) Cost (Rs.) Per unit Cost
(Rs./100 ml)
1 Raw material 251677.98 -- 251677.98 1.72 43.66
2 Labour 32038.07 32038.07 -- 0.22 5.56
3 Electricity 2057.79 -- 2057.77 0.02 0.36
4 Water 114.93 -- 114.93 0.001 0.02
5 Steam 506.25 11.64 494.61 0.003 0.09
6 Refrigeration 5269.53 454.23 4815.30 0.04 0.91
7 Administration and Supervision 68763.60 68763.60 -- 0.47 11.93
8 Repair and maintenance 2650.00 -- 2650.00 0.02 0.50
9 Store maintenance 8710.53 8710.53 -- 0.06 0.46
10 Quality Control 1556.31 589.06 967.25 0.01 0.27
11 Packaging 117233.60 -- 117233.60 0.80 20.33
12 Depreciation on equipments and building 85500.00 85500.00 -- 0.59 14.83
13 Sundries 435.00 -- 435.00 0.002 0.08
Total Cost 576513.59 196067.13 380446.46 3.93 100.00
Per unit cost 3.93 1.34 2.59
(100 ml cup) (100.00) (34.01) (65.99)
Figure in parenthesis are the percentage of total cost; Total production in a year 146542 cups/100 ml

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 Current Aspects in Business, Economics and Finance Vol. 5
Economics of Dairy Products: A Case Study

Contributory margin was highest of Rs.33.84per kg where total fixed cost was
Rs.64,620.54 and average variable cost and selling price were Rs.20.23 per
500gm and Rs.40 per 500gm,respectively.After analysis of data ,the break-even
level of output was found to 1634.31 kg but actual output was 4,906 kg. This
shows that the dairy plant is having surplus production of 3721.69 kg of output
[10-13].

Ice-cream contributing 5.94 percent share in the total revenue of the dairy plant.
During the study period,1,46,542 cups of ice-cream was manufactured involving
an expenditure of Rs.5,76,513.59. The percentage share of variable cost was
65.99 percent and fixed cost was 34.05 percent in the total cost of manufacturing
ice-cream. The average manufacturing cost was Rs.3.93 per /100 ml cup of ice-
cream.

Added cost of ingredients, raw material including cow milk, sugar, flavor and
stabilizer was Rs.1.72 per cup. Packaging is more important to self life incurring
an expenditure of 80 paise per cup. The expenditure due to depreciation on
equipments like homogenizer, ice-cream mix tank , continuous ice-cream
machine, ice-cream filling machine ,deep freezer and space occupied by
equipments in building was 59 paise per cup, followed by administrative and
supervision expenditure amounting 47 paise per cup and labour expenditure
amounting 22 paise per cup. Other components of total cost were individually
less than 10 paise.

This analysis shows that contributory margin was highest Rs.4.41 per 100ml cup
in case, where fixed cost was Rs.1,96,067.13 and average variable cost and
selling price were Rs.2.59 per 100 ml cup and Rs.7for 100 ml cup respectively.
After analysis of data ,break-even level of output was found to 44,549.67cup for
100ml, but the actual output was 1,46,542 cups of 100ml.This shows that dairy
plant is having surplus production of 1,02,082.33 cups of 100 ml output.

5. CONCLUSION

The study shows that Burfi and Ice-cream for which the costing were carried out
fetching good profit though there was inter product difference for various cost
components. Burfi and Ice-cream were produced much above the break-even
output level. This study suggested that dairy plants always run above the break-
even output level; otherwise, they stop production to avoid loss in a dairy plant.
Also, it is suggested that the plant should run with total capacity and efficiently to
achieve a better profit margin. Ice cream fetches more profit than burfi, among all
dairy products. Also, this study suggests that the small milk producer and self-
help groups should engage in value-added product processing on their own by
taking training from institutions to generate income and employment to support
the rural economy.

COMPETING INTERESTS

Authors have declared that no competing interests exist.

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 Current Aspects in Business, Economics and Finance Vol. 5
Economics of Dairy Products: A Case Study

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Economics of Dairy Products: A Case Study

Biography of author(s)

G. N. Narnaware
Department of Dairy Business Management, College of Dairy Technology, Warud (Pusad), District -
Yavatmal, Maharashtra Animal and Fishery Sciences University, Nagpur, India.

Research & Academic Experience: He has More than eighteen years of experience in Research,
Academics and Extension.

Research Area: His research area includes in Costing of Dairy Products.

Number of Published paper: He has published Four papers.

Special Award: He received Junior Research Fellowship ICAR,New Delhi.

Dr. Devendra Kumar Kurrey

Indira Gandhi Krishi Vishwavidyalaya, Raipur, India.

Research and Academic Experience: He has 9 years of Experience in many reputed organization like
NIRDPR Hyderabad, ICFRE Dehradun, Rural Development Department conducted action research and
policy briefs.

Research Area: His research area includes in Climate Change ,Sustainable Agriculture, women
empowerment and rural development.

Number of Published papers: He has published Research Paper 9 and 11 Articles.

Special Award: He was Certified Farm Advisor 2018 (Manage, Hyderabad), National Resource person
2020 (NIRDPR, Hyderabad), Young Researcher Award 2021(InSC,Bengaluru), Utkrishth Lekhan
Samman 2021(Krishak Bharti, Gwaliar).

Any other remarkable point(s): ASRB ICAR NET-2021, Chhattisgarh SET (Economics).
___________________________________________________________________________________
© Copyright (2022): Author(s). The licensee is the publisher (B P International).
DISCLAIMER
This chapter is an extended version of the article published by the same author(s) in the following journal.
Asian Journal of Agricultural Extension, Economics & Sociology, 40(10): 759-763, 2022.

Reviewers’ Information
(1) Surendar Gade, Narsee Munjee Institute of Management Sciences (NMIMS) University, India.
(2) Suvangi Rath, Odisha University of Agriculture and Technology, India.

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