# Chapter 5 Cost analysis and product price

An accurate cost analysis of a freezing application can only be done on a case by case basis. Tables 7 and 8 show some useful data for freezing cost analysis and many factors have to be considered that depend on local conditions and economics (Johnston et al., 1994). However:

• initial cost of freezer;

• lost interest in cash outlay of freezer;

• maintenance and repair;

• electricity needed to reach and maintain freezing temperatures;

• packaging materials;

• added ingredients, such as sugar or anti-darkening agents.

A small-scale operation usually means higher cost per kilogram of product frozen. Thus, capital cost related to the production capacity decreases as the freezer size increases. The initial cost of a freezer varies with size, type, special features, and age. New freezers require little repair the first year or so. However, in the long-run, the U.S. Department of Agriculture (USDA) recommends an expected repair cost for new freezers of 2 percent of the purchase price per year. For used freezers, this rate may be higher (Johnston et al., 1994).

The cost of water and fuel used in washing, blanching, and chilling foods varies with area charges for these commodities and individual practices. Also, the cost of added ingredients also varies with type and quantity added. Added ingredients to consider include sweeteners such as sugar and honey and anti-darkening agents such as citric acid and ascorbic acid.

Costs should generally be calculated as the cost per unit weight (kilogram or metric ton) of the frozen product. This gives the real cost of the process and also takes into account the plant utilization factor, which is extremely important. One UK processor divides the freezing costs into proportions as stated below:

Table 7. Comparison of freezing times for small fruits and vegetables
(Johnston et al., 1994)

 Method Approximate freezing times Package freezing (10 oz containers): Air blast 3 to 5 hr Plate 1/2 to 2 hr Bulk freezing - air blast: Belt 20 to 30 min Fluidized belt or tray 5 to 10 min Cryogenic freezing 1/2 to 1 min

## 5.1 Cost analysis

The Total cost of a freezing plant is generally divided into two main areas: investment cost and production cost. These costs can be further broken down into individual costs as shown below:

• Sample cost analysis and price determination for frozen mixed vegetables with 1 000 kg/month production rate is estimated on the basis of simplified determinations.

Table 8. Freezing cost proportions (Johnston et al., 1994)

 Preparation labor costs 48% Packaging 10% Freezing 10% Overheads 32%

### 5.1.1 Investment cost

A capital investment is required for any industrial process, and determination of the necessary investment is an important part of the plant design project. The investment cost of a processing plant generally includes the cost of general pre-operation expenses, such as the establishment of the company, necessary licenses, training, tests or previous studies, and asset expenses like buildings, land, machines, materials, tools, and installation costs.

• Pre-operation expenses: The cost of pre-operation expenses varies depending on the application. Considering the main items included, a simple assumption of US\$ 250 can be estimated for pre-operation expenses (including licenses, training of workers, local cost ...).

• Asset expenses: Estimation of asset cost is given in Table 9 for frozen mixed vegetables.

### 5.1.2 Production cost

All expenses directly connected with the manufacturing operation, or the physical equipment of a process plant itself, are included in production costs. These expenses are subdivided into variable cost and fixed cost.

Table 9. Estimation of asset cost for frozen vegetables

 Asset cost Assets Quantity Unit Cost (\$US) Total Cost (\$US) Semi-industrial Kitchen 1 250.00 250.00 Digital Scale 1 100.00 100.00 Domestic Freezer 1 600.00 600.00 Storage Room 1 300.00 300.00 Utensils - 150.00 150.00 TOTAL US\$ 1 400.00

 Pre-operation cost US\$ 250.00 Asset cost US\$ 1,400.00 Invest cost US\$ 1,650.00

Variable cost

Variable cost is a direct production cost including expenses directly associated with the manufacturing operation. This type of cost involves the following expenditures:

• raw materials;

• operating labour;

• power and utilities (steam, electricity, fuel, refrigeration, water, etc);

• maintenance and repair;

• operating supplies;

• laboratory charges.

Fixed cost

Fixed costs remain almost constant from year to year and do not vary with the production rate. Expenses included in this cost item:

• depreciation;

• taxes and insurance;

Variable cost: example

1. Calculation of labour cost: Considering US\$ 300 (per month) per labour for a freezing process in which 2 workers are employed, a labour cost of US\$ 600 can be estimated.

2. Cost of energy for a freezing process is calculated based on several factors, of which energy efficiency of the freezing systems is one of the most important. Based on the energy consumption of the equipment per hour, energy tariffs and hours of operation, a simple operating cost in terms of energy can be calculated:

 Production rate: 1 000 kg of frozen vegetables per month (2 000 packages); Freezer capacity: 40 kg of frozen product in 20 hours; Working capacity: 500 hrs of operation per month; Average electricity cost: US\$ 0.10/kW, Power: 1.5 kW for 500 hrs = 750 kWh/month;750 kWh at US\$ 0.10/kW = US\$ 75/month.

 Raw materials and supplies (100 kg vegetables) Raw Material Quantity Unit Cost US\$ Total Cost US\$ Carrot (kg) 25 1.25 31.25 Green Beans (kg) 25 2.50 65.50 Onion (kg) 25 1.25 31.25 Cauliflower (kg) 25 2.00 50.00 Water (l) 500 0.01 5.00 Packaging Material 200 0.05 10.00 TOTAL US\$ 193.00

4. Calculation of cost of raw materials and supplies required for 1 000 kg of product.

 Raw materials and supplies: US\$ 193 x 10 = US\$ 1 930.00 Labour cost: US\$ 600.00 Energy cost: US\$ 75.00 Total variable cost: US\$ 2 605.00

Fixed cost: example

1. Calculation of depreciation cost:

Annual depreciation = Total price of equipment/8
Monthly depreciation = Annual depreciation/12

Total asset cost = US\$ 1 400.00
Annual depreciation US\$ 1 400/8 = US\$ 175
Monthly depreciation US\$ 175/12 = US\$ 14.58

 Monthly administrative cost Description Monthly cost (US\$) Repair and Maintenance 75,00 Cleaning and Disinfecting 50,00 Utilities 50,00 Production Chief 200,00 Other 50,00 TOTAL 425,00

 Depreciation cost: US\$ 14.58 Administrative cost: US\$ 425.00 Total fixed costs: US\$ 439.58 Total variable costs: US\$ 2 605.00 Total fixed costs: US\$ 439.58 Total production cost: US\$ 3 044.58

## 5.2 Product price determination

To determine the sales price of the product, unit price of the product has to be calculated. Sales price of a product mostly depends on the following items:

• unit production cost;

• competence price;

• demand for product;

• capacity of market;

• time for recovery of investment cost.

Calculation of Unit sales price is based on Total production costs. Production rate of 1 000 kg/month and 500 g of vegetables per product package is considered in calculations.

Unit cost (per package) = US\$ 3 044.58/2 000 = US\$ 1.52

• Unit sales price is estimated as US\$ 3.20 depending on market.

## 5.3 Equilibrium production rate

Equilibrium value is defined as the minimum unit quantity of product to be sold in order to cover production cost. Equilibrium production rate is calculated according to the following formula:

Minimum unit = Fixed cost/(Unit product price - Variable unit cost)

• Variable unit cost: Total variable cost/2 000

Variable Unit Cost (per package) = US\$ 1.30

• Minimum Unit = US\$ 439.58/(US\$ 3.20 - US\$ 1.30)
Minimum Unit: 232 packages

In order to cover production cost, 232 product packages out of 2 000 must be sold on a monthly basis.