MODULE 1: OVERVIEW OF PROCESS ANALYSIS AND PLANT DESIGN

Lesson 2: Economic and Technical Aspects of Agricultural Processing Plant Design

Learning Outcomes: At the end of the lesson the students will be able to:
1. Discuss the economic,technical and other aspects to consider in a feasibility study of
Agricultural Processing Plant Design

Time Frame: 10 hrs

Introduction:
Some aspects of food plant design and food processes economics must be considered in order to have
a better picture of the whole food processing plant. As describe in the previous lesson, plant design should
consider the technical and economic factors, various unit operations involved, existing and potential market
conditions, etc.
The design process on all projects follows the same stages of development. However the extent and
detail of the activities behind each stage are different with every project. This lesson provides some details
about the economic and technical aspects of food processing plant design particularly in the aspects of pre
selection / pre feasibility stage and analysis stage which describes the market analysis and situational analysis
related to market

Introduction to Feasibility Study and Analysis

Feasibility Study
- It involves an analysis and evaluation of the design concept from all the relevant angles.
- It provides an immediate indication of the probable success of the enterprise and also shows what
additional information is necessary to make a complete evaluation.
- It gives an insight to requirements of human, financial and material resources; plant and machinery,
technology; and economic gains or profitability of the proposed venture.
- It involves a certain number of stages during which various elements of the plant design are
prepared and examined to arrive at appropriate decision.

Pre selection/Pre-feasibility stage

- It can be viewed as a series of steps culminating in a document which permits determination of

whether or not a complete detailed feasibility study should be made.
- Since a complete feasibility study is time consuming and expensive, it may be desirable to perform a
pre feasibility analysis in order to further screen the possible ideas. In this manner, the data are
usually gathered in an informal manner.

- The purpose of a pre feasibility study is to:

1. Determine whether the project seems to justify detailed study
2. Determine what matters deserve special attention in the detailed study (e.g. market analysis,
technical feasibility, investment costs)
3. Determine an estimate of cost for the detailed study
 - Pre-feasibility analysis may provide adequate evidence of venture profitability if certain segments
(giving market aspects and materials primary emphasis) are more carefully verified.
- It may include some or all of the following elements:
1. Product description
- The product's characteristics should be briefly described, along with possible
substitutes which exist in the market place. Also, allied products should be
identified, which can or should be manufactured with the product under study.

2. Description of market
- The present and projected potential market and the competitive nature of the
market should be delineated. An answer to the following questions should be
considered:

a. Where is the product now manufactured?

b. How many plants exist and how specialized are they?
c. What are the national production, imports, and exports?
d. Are there government contracts or incentives?
e. What is the estimated product longevity or future consumption?
f. What is the price structure?

3. Outline of technological variants

- The technology choices that exist for the manufacture of the product should be
described briefly. Also, the key plant location factors should be identified.

4. Availability of main production factors

- Production factors such as raw materials, water, power, fuel and labor skills should
be examined to ensure availability.

5. Cost estimates
- Estimates should be made of the necessary investment costs and costs of operation.

6. Estimate of profit
- The data gathered should include estimates of profits of firm manufacturing similar
products or, if the preliminary data are extensive, an actual estimated profit for the
project under study.

7. Other data
- In certain cases, local attitudes toward industry; educational, recreational and civic
data; and availability of local sites, may be the most important in the evaluation of
the suitability of a proposed product, especially in the case of the establishment of
a new firm.

Analysis stage

- At the analysis stage, various alternatives in marketing, technology and capital availability need to
be studied. The complete study is referred to as techno-economic feasibility study.
- In some cases such a detailed study is not necessary.
For example, if the product has an assured market, in-depth market analysis is not required.
- In some cases, a partial study of the market or of the technologies satisfies the data requirements for
decision making.

- The detailed analysis should include the following:

1. Market analysis / study
- Market analysis can serve as a tool for screening venture ideas and also as a means
of evaluating the feasibility of a venture idea in terms of the market.
- It provides:
a. understanding of the market
b. information on feasibility of marketing the product
c. analytical approach to the decision making

- It also assists in analyzing the decisions already taken.

- Market analysis answers questions about:
a. size of market and share anticipated for the product in terms of volume
and value
b. pattern of demand
c. market structure
d. buying habits and motives of buyers
e. past and future trends
f. price which will ensure acceptance in the market
g. most efficient distribution channels,
h. company's strong points in marketing

- Market analysis involves systematic collection, recording, analysis, and

interpretation of information on:
a. existing and potential markets
b. marketing strategies and tactics
c. interaction between market and product
d. marketing methods
e. current or potential products

- In collecting the market data, for whatever size market or type of product, it is
helpful to follow an orderly procedure. The initial step is to put down in writing a
preliminary statement of objectives ( in question form) in as much detail as possible. When
setting objectives, always keep in mind as to how the information will be used when it is
obtained. This helps in eliminating objectives that would not make a contribution to the
market analysis.

2. Situational analysis related to market

- This involves analyzing the product's relationship to its market by using readily
available information. The information reviewed and each question asked will give the
analyst a feel for the situation surrounding the product.

- This involves an informal investigation which includes talking to people in

wholesale market, brokers, competitors, customers and other individuals in the industry. If
this informal investigation produces the sufficient data to measure the market adequately, the
analysis need not proceed further. Also, in some instances, where time is critical or where
budget is a problem, the data gathered during the informal market analysis may be all that is
available on which to base decisions.
- The informal analysis will:
a. provide the basis for revision of the objectives and frequently indicates
the most fruitful methods by which market can be studied.
b. Help in preparing a comprehensive programme of market study. This
should include a description of the tasks and methods by which each
type of information is to be gathered and should include not only the
 time schedule for each task, but also an estimate of costs likely to be
incurred.

- The basic steps involved in a market study for a new enterprise are:
a. Define objectives of the study and specify information required
b. Workout details of the study as under:
 identify sources of information (both secondary and primary)
 time and cost involvement
 methodology and action plan
c. Select samples and decide contacts and visits
d. Prepare the questionnaire as the survey instrument
e. Conduct the survey and analyze information
f. Prepare the report with findings and interpretations

- The analysis should generally contain:

a. A brief description of the market including the market area, methods of
transportation existing rates of transportation, channels of distribution,
and general trade practices.
b. Analysis of past and present demand including determination of quantity
and value of consumption, as well as identification of the major
consumers of the product
c. Analysis of past and present supply broken down as to source,
information on competitive position of the product such as selling prices,
quality, and marketing practices of the competitors.
d. Estimate of future demand of the product
e. Estimate of the project‟s share of the market considering all above factors

3. Technical analysis:
- This must establish whether or not the identified venture is technically feasible and,
if so, make tentative choices among technical alternatives and provide cost
estimates in respect of:
1. fixed investment
2. manufacturing costs and expenses and
3. start-up costs and expenses

- In order to provide cost estimates, tentative choices must be made among technical
alternatives such as:
a. level of product / manufacturing technology,
b. raw material inputs,
c. equipments,
d. methods,
e. organization, and
f. facilities location and design.

- The analysis report should incorporate:

a. Description of the product, including specifications relating to its physical,
mechanical, and chemical properties as well as the uses of the product
description of the selected manufacturing process showing detailed flow
charts as well as presentations of alternative processes considered and
justification for adopting the one selected
 b. Determination of plant size and production schedule, which includes the
expected volume for a given time period, considering start-up and
technical factors

c. Selection of machinery and equipment, including specifications,

equipment to be purchased and origin, quotations from suppliers, delivery
dates, terms of payment, and comparative analysis of alternatives in terms
of costs, reliability, performance and spare parts availability

d. Identification of plant's location and assessment of its desirability in terms

of its distance from raw material sources and markets. For a new project
this part may include a comparative study of different sites, indicating the
advantages and disadvantages of each

e. Design of a plant layout and estimation of the costs of erection of the

proposed types of buildings and land improvements

f. Study of availability of raw materials and utilities, including a description

of physical and chemical properties, quantities, needed, current and
prospective costs, terms of payment, source of supply and their location
and continuity of supply

g. Estimate of labour requirements including a breakdown of the direct and

indirect labour supervision required for the manufacture of product

h. Determination of the type and quantity of waste to be disposed of,

description of the waste disposal method, its costs and necessary clearance
from the authorities

i. Estimation of the production cost for the product

- The elimination of inappropriate technology alternatives for producing the

identified product can be done on the basis of side effects. The factors which may be
considered as side effects include:
a. contribution to employment
b. requirements for scarce skills
c. energy requirements
d. capital requirements
e. need for imported equipment
f. support of indigenous industry
g. multiplier effect of the venture operation
h. environmental effects
i. safety and health hazards

- Information concerning manufacturing processes and equipment, which may

facilitate the selection and decision making, may be obtained from:
1. existing manufacturers of the product,
2. trade publications,
3. trade associations and organizations, and
4. equipment manufacturers.
4. Financial analysis:

- This emphasizes on the preparation of financial statement, so that the venture idea
can be evaluated in terms of commercial profitability and magnitude of financing
required.

- It requires the assembly of the market and the technical cost estimates into various
proforma statements. If more information on which to base an investment decision is needed,
a sensitivity analysis or, possibly, a risk analysis can be conducted.

- The financial analysis should include:

a. For existing companies - audited financial statements, such as balance

sheets, income statements and cash flow statements

b. For new companies - statements of total project costs, initial capital

requirements and cash flows relative to the project time table

c. For all projects-financial projections for future time periods, including

income statements, cash flows and balance sheets

d. Supporting schedules for financial projections, stating assumptions used

as to collection period of sales, inventory levels, payment period of
purchases and expenses, elements of product costs, selling, administrative
and financial expenses

e. financial analysis showing return on investment, return on equity, break-

even volume and price analysis

g. Sensitivity analysis to identify items that have a large impact on

profitability or possibility of risk analysis

5. Sensitivity and risk analysis

- The purpose of sensitivity analysis is to identify the variables that most affect
the outcome of a venture.

- This involves specifying the possible range for the variable, such as price, and
calculating the effect of changes in this variable to profitability. With such a calculation,
the analyst can determine the relative importance of each of the variables to profitability.
However, only risk analysis can provide any indication of the likelihood that such events
(change in product price) will actually occur.

- Risk analysis takes into account the recognized fact that variables, such as product
price, depend on future events whose occurrence can not be predicted with certainty. Hence,
investment decision situations can be characterized with respect to certainty, risk and
uncertainty. Since certainty seldom exists for future returns on investment, only risk and
uncertainty are of interest. Uncertainty is used to refer to an event, such as technological
breakthrough resulting in obsolescence, that is expected to take place although the probability
of its occurrence cannot be forecasted during the venture's lifetime. Risk refers to a situation
in which a probability distribution of future returns cannot be established for the venture. The
riskiness of the venture can be defined as the variability or dispersion of its future returns.
 - The purpose of risk analysis is to isolate the risks and to provide a means by
which various venture outcomes can be reduced to a format from which a decision can be
made.

Feasibility cost estimates

- Preliminary control estimate is often used in the feasibility report.

- This is prepared, generally, after the completion of the process design and major equipment listing.
- Accuracy of this estimate may vary between + 15 and 25 present.
- Endeavour is usually made to achieve a +20 present accuracy in the feasibility report estimates. For
a rule of thumb, the following are the percentages of the venture cost factors:
 Project development and detailed project report (DPR) preparation - 2 %
 Engineering and design - 13 %
 Brought out materials and equipment-55 %
 Fabrication and construction- 30 %
Note: Depending on the type of venture, sector and complexity, these can vary on either side.

Break-Even Analysis

- Break-even analysis is a technique widely used by production management and management

accountants.

- It is based on categorizing production costs between those which are "variable" (costs that change
when the production output changes) and those that are "fixed" (costs not directly related to the volume of
production).

- In this analysis, the total variable and fixed costs are compared with sales revenue in order to
determine the level of sales volume, sales value or production at which the business makes neither a profit nor
a loss (the "break-even point").

- “A breakeven analysis is used to determine how much sales volume business needs to start
making a profit.”

 The Break-Even Chart

- The break-even chart is a graphical representation of costs at various levels of activity

shown on the same chart as the variation of income (or sales, revenue) with the same

variation in activity. The point at which neither profit nor loss is made is known as the

"break-even point" and is represented on the chart below by the intersection of the two

lines:
 - In the diagram above, the line OA represents the variation of income at
varying levels of production activity (output). OB represents the total fixed costs
in the business.

- As output increases, variable costs are incurred, meaning that total costs
(fixed + variable) also increase. At low levels of output, Costs are greater than
Income. At the point of intersection, P, costs are exactly equal to income, and
hence neither profit nor loss is made.

 Fixed Costs

- These are those business costs that are not directly related to the level of production or
output. In other words, even if the business has a zero output or high output, the level of
fixed costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of
investment in production capacity (e.g. adding a new factory unit) or through the growth in overheads
required to support a larger, more complex business.

Examples of fixed costs:

- Rent and rates

- Depreciation

- Research and development

- Marketing costs (non- revenue related)

- Administration costs
 Variable Costs

- Theses are those costs which vary directly with the level of output.

- These represent payment output-related inputs such as

Examples of fixed costs:

- output-related inputs such as raw materials, direct labour, fuel and
- revenue related costs such as commission.

 Break Even Point (BEP) Calculation

- Calculation of BEP, per unit of production, can be done using the following formula:

Total Fixed Costs

BEP =
(Unit's selling Price − Unit's variable costs)

Example:

Suppose that fixed costs for producing 100000 units were $30,000 a year. Variable
costs are $2.20 materials, $4.00 labour, and $0.80 overhead, for a total of $7.00. If selling
price was chosen as $12.00 for each units, then the break even point will be:

$30,000
BEP =
$12.00 − $7.00 )

BEP = 6,000 units - (This is the number of units that have to be sold at a selling price of
$12.00 before business will start to make a profit).

 Advantages and limitation of Break Even Analysis

- These explains the relationship between cost, production volume and returns.

- The major benefit to using break-even analysis is that it indicates the lowest amount of
business activity necessary to prevent losses. However, it is best suited to the analysis of one
product at a time.
REFERENCES:

1. Sharma, A.K.. and Kumbar B.K. (n.d). Food Processing Plant Design and Layout. Retrieved from
https://www.agrimoon.com/wp-content/uploads/Food-Processing-Plant-Design-layout.pdf. on February
10, 2022.
2. Food processing plant design & layout: Lesson 2. Food plant design process. (2013, October 8). e-Krishi
Shiksha. https://ecoursesonline.iasri.res.in/mod/page/view.php?id=124496.
3. Dekker, M. (2003). Principles of Food Process Design. Retrieved from
http://bowenstaff.bowen.edu.ng/lectureslides/1586932855.pdf. on February 10, 2022