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Project Report on

Product Cost Analysis

Submitted to

Prof. Fareena Noor

Submitted by

Hassan Abbas (L3f08bcom2312) Muhammad Saad (L3f09bcom2599) Hafiz Islam Aslam (L3f08bcom2325) Adil Naeem (L3f08bcom2314) Osama Imran (l3f08bcom2366)
Section no.

B-5 (F)

Faculty of Commerce
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University of Central Punjab

ACKNOWLEDGEMENTS
We are thankful to Almighty Allah for the countless blessings and infinite mercy, which enabled us to complete this report work. We wish to extend our sincere appreciation to our course instructor Ms. Fareena Noor, under whose guidance and help, this report was completed. We are thankful to her for her extremely valuable advises. Our thanks also due to all the persons involved in our project report, without whom it would be possible.

Hassan Abbas Hafiz Islam Aslam Muhammad Saad Adil Naeem Osama Imran

EXECUTIVE SUMMARY
The purpose of this report is to fully understand the working of Bala Footwears. Bala Footwears started its business in 1985 in Lahore, Pakistan. We have analyzed the whole firms procedure and understood the work environment of the firm. In this report, weve incorporated all the businesses and products of Bala Footwears. Apart from that detailed cost of the product such as variable cost, fixed cost and profit calculations are provided in the report, economic problems face by the production department, causes of failure of the product and suggestions to increase the demand of the product are also included. The study indicates that there is potential for higher growth of the industry and it can become a source of exports earnings. The study suggests that in the rapidly changing environment and in the face of increasing cost of doing business in Pakistan, there is a need to strengthen the competitiveness of the footwear industry in Pakistan.

TABLE OF CONTENTS

Introduction of Company
Bala Footwear is one of Pakistans most quality conscious and progressive footwear companies. Located in Lahore, it maintains a fine combination of comfort, style and workmanship and is embarking upon appreciable growth plans for the future.

History:
Bala Footwear Co. was established in 1985 under the name of Bala Hawaii Chappal. Under this brand name, companys main products are indoor slippers (including house slippers, hotel slippers) and outdoor slippers (including clogs, flip flops and nude slippers) with the annual production capacity of 1,300,000 pairs. With sincere services and high quality products, it has built long term business relationship with many customers all over the Pakistan. After several years of business, in 2005 a new division of Bala Footwear Co. was named established Bala Eva. Equipped modern facilities, company is now able to produce all sorts of EVA sandals and slippers, featuring high quality, novel style with competitive price. Company always pays much attention to quality and quality control. Its footwear products enjoy a good reputation for high quality due to have own raw material manufacturing unit to maintain the quality. With the success of companys products and support from customers all over the Pakistan, now it has started to produce polyurethane slippers and sandals by using the new technology called Direct on Upper under the Division formed in 2009 named Bala PU. Equipped with a group of excellent production technicians, advanced equipment, it has great ability and capacity in designing and developing new products. In addition, it continually develops products and production process such as importing advanced machinery from Taiwan, China and improving the quality of polyurethane.

Hierarchy of the Organization:

CEO Haji M. Aslam

Department Head Departments Head

Haji M. Afzal

Haji M. Iqbal

Shahid Iqbal

Mehmood Ahmed

Javed Iqbal

Maqsood Ahmed

Labor Dep.

Stock Dep.

Purchase Dep.

Sales Dept

Accounts Dep.

Production Dept

Finance Dep.

Import & Export Dep.

Product Range:
Bala Footwear stepped into the footwear industry in 1985. It started off with the

manufacturing of Hawaii slippers and subsequently diversified into manufacturing following: 1. PU Shoes, 2. EVA Close Shoes, 3. PVC Shoes. 4. Hawaii slippers.

Under the strict vigilance and support of the CEO of company Haji Muhammad Aslam, it has carved a niche in the field of footwear items such as casuals PU Slippers and PVC Shoes. Company was set with an objective of setting a modern plant for the purpose of manufacturing Hawaii Chappals. The company is also recognized as one of the quality EVA footwear manufacturers and suppliers from Pakistan.

Introduction of the Product

The product which we have selected for analysis is PU Slippers. PU slippers can be manufactured in different styles and designs i.e. light, tough, comfortable, flexible, waterproof, hard-wearing or shock absorbent as required, simply by varying the formulation. When it comes to everyday living for the modern woman, PU slipper is the ladies shoe that stands apart from the rest. Featuring trendy designs and go-anywhere comfort, easy to maintain leather upper and durability. The other features of PU slippers are as follows: 1. Direct attach PU outsole for durability and flexibility. 2. Blend of fashion with comfort. 3. Ideal casual wear. 4. Attractive styling. All the required calculations are given the proceeding part of this report.

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Economic Problems
PU Raw Material:
In production, polyurethane resin (PU) is very important without it production is not possible. One of the biggest issues is the availability of PU resin. In summers due to increase in the demand of PU resin, chances of shortage of it increase. When we talk about the PU resin, price variation also matters because half of the cost of production per unit depending on it.

Electricity and Sui Gas shortage:

In production, electricity is the only major element that leads to production. One of the major problem is electricity shortage that results in the less production and increase in per unit cost of electricity. Moreover Sui gas shortage also disturbs the production process facing by many industries in Pakistan.

Artificial Leather:
Artificial leather also matters in the production process. Now-a-days in Pakistan prices of leather has also gone up. The PU resin is also the main production material for making leather, so, both raw materials are increasing the production cost of PU Slippers, damaging the prices of PU Slippers and the demand.

Lack of Skilled Labor:

Without labor production is not possible, so factories cant forget the importance of workers. The workers are the precious asset of the company if it is skilled, but unfortunately in Pakistan most of the labor consists of unskilled and demands high wages. So, company is relying on the less skilled labor affecting the standards of production.

Intervention of Chinese products:

The great availability of Chinese PU slippers in local market is giving tough competition to the Bala PU slippers affecting their demand in the market.
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Production Analysis
The production of the PU slipper is based upon the demand of the various articles. The company has more than 70 articles of PU slipper for both ladies and gents and cant make over production of any specific article because its per unit cost is very high. The Company is producing mainly on order bases by the retailers and wholesalers the different markets of Pakistan. The company is also producing separate quota for exporting purposes. According to the company representatives, over production of an article without specific demand may leads to blockade of money. In the production planning, one thing is very important i.e. the current trends, designs and styles, because ignoring these issues or making out-dated styles can result loss to the organization. The production capacity of this firm for the PU slipper for 10 hours shift is 3000 pairs. And it can produce the 75000 pairs per month.

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Fixed Cost related to Production of PU slippers (one month)

The factory place is also contributing to the productions of other three products so, the Rent, labor salary and management salary is divided in four parts and one part is used as the fixed cost of the PU slippers segment Factory Rent Factory Permanent Labor salary Management Salaries Depreciation Expense Manufacturing Plant Rs. 5000000 10% 1/12 = Rs.41667/month Rs. 156,917 Rs. 343000/4 = Rs. 85750 Rs.38000/4 = Rs. 9500 Rs. 80000/4 = Rs. 20000

TOTAL FIXED COST

Variable Cost related to Production of PU slippers (one month)

Polyurethane Material Cutting Charges Printing Charges Embossing Charges Upper Leather Inner Leather Upper-Man Wage Bottom-Man Wage Production labor Wage Packing Trimming Wage Electricity Charges Packing Material Transportation Cost Other Misc.exp Buckles TOTAL VARIABLE COST Rs.5250000 Rs.300000 Rs.300000 Rs.225000 Rs.1875000 Rs.1125000 Rs.525000 Rs.225000 Rs.750000 Rs.450000 Rs.375000 Rs.525000 Rs.150000 Rs.375000 Rs.675000 Rs.13125000
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Cost Analysis
Variable Cost per Unit:
Items Polyurethane Material Cutting Charges Printing Charges Embossing Charges Upper Leather Inner Leather Upper-Man Wage Bottom-Man Wage Production labor Wage Packing Trimming Wage Electricity Charges Packing Material Transportation Cost Other Misc.exp Buckle Variable Cost per Unit Rs. 70 4 4 3 25 15 7 3 10 6 5 7 2 5 9 175

Fixed Cost per unit:

Fixed Cost per unit = Total Fixed Cost / No. of Units Fixed Cost per unit = 156917/ 75000 = Rs. 2.09

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Profit Calculations
The price selling charged by the company is as follows: Price of PU slipper/unit = Rs. 195

Profit considering Average variable cost

Per Unit Profit = (P AVC) Per Unit Profit = (195 175) Per Unit Profit = Rs. 20

Total Profit = Q (P AVC) Total Profit = 75000 (195 175)

Total Profit = Rs. 1,500,000

Profit considering Average cost

Average Total Cost per unit = Average Cost per unit + Average Fixed Cost per Unit TC = 175 + 2.09 TC = 177.09 Per Unit Profit = (P AVC) Per Unit Profit = (195 177.09) Per Unit Profit = Rs. 17.91

Total Profit = Q (P AC) Total Profit = 75000 (195 177.09)

Total Profit = Rs. 1,343,250

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Market Structure
The company is facing perfect competition because of the following conditions: Number and size of sellers: The size distribution of firms is also an important characteristic of market structure. In footwear industry there are many sellers, however few are larger like Bata and Service etc. and rest are medium and small scale.

Number and size of buyers: Market can also be characterized by the number and size distribution of buyers. In the market, there are many small buyers of PU slipper; all buyers are likely to pay about the same price.

Product Differentiation: Product differentiation refers to the degree that the output of one firm differs from that of the other firms in a market. Whereas the market selected product are undifferentiated and decisions to buy are made strictly on the basis of prices.

Entry/ Exit: Entry barriers are high however exit barriers are low. High investments and capital is required to enter this industry .On the other hand technical knowledge, expertise and availability of skilled work force makes entry barriers high. National and international level competitors are competing at the same platform with minor variations.

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Pricing of Goods and Strategies

The company is using penetrating price strategy on the basis of their production cost. They are pricing their products with low profit margin in order to increase the demand for products and to stay competitive and to increase sales; hence increasing the market share. The product is available in three different packaging depending on their quality of PU resins and the quantity of order, the prices are as follows: Package 1 prices = Rs. 185/unit Package 2 Price = Rs. 195/unit Package 3 Price = Rs. 210/unit The product which we have used for calculation is package 2 having price Rs.195.

Causes of the failure of the product

1. One of the most important problems for failure of product is higher energy prices. Increasing energy and inputs prices leads to an increase in the cost of production that influences the expected production and the increased prices 2. Outdated production methods are still prevailing in the factory. 3. Improper availability of raw material. 4. Transportation and utility infrastructure facilities are not adequate. 5. The company is facing high competition from china providing cheaper footwear product in markets.

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Steps to Increase Demand

1. The company needs new techniques for production, product designs and there is great room of improvement in marketing of the product. The company is not giving adequate importance to the marketing of their product. 2. The company needs to build the outlets at domestic level and should improve distribution to appropriate sellers. 3. Participation in trade fairs can increase the opportunities to find market for their exports as well as unexplored domestic markets. 4. The company needs to develop the research and development department for improving quality and physical testing of their products. 5. Use of e-commerce strategies can broaden their product market and customer net.

Advertisements and Promotions

There is great need of promoting the products as Bala is not well established in the sense of Brand name and people are not familiar with its, so, the company should use following modes of promotion and advertisement of their products, we are not recommending television ads as it is expensive mode of advertisement and company is producing on cost effectiveness. The company should use following modes of advertising 1. Road side boards 2. Newspaper ads 3. Promotional pamphlets The companys major mode of advertising should be road side bill boards and pamphlets. Other Recommended promotional schemes company should Introduced are: 1. Buy one and get second one at 25% discount for final customers. 2. For wholesalers, giving them allowances on achieving the target sale in a month or year. And greater profit margins for the retailers and wholesalers.

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Companys role in the economy of Pakistan

Some sectors of Pakistan economy have shown a good performance in terms of production and exports. Footwear is one such industry which has increased its exports at largely extent last 6-7 years. Pakistan footwear industry manufactures around 150 million pairs annually for local consumption and it exports 2.2 million pair per annum roughly and the average price charged for each pair stands for $10. The population of Pakistan is expected to be about more than 172 million in the year 2011, keeping in view the growth in population, the growth in the demand of footwear industry is also anticipated. As far as Bala Footwear Co. is concerned it has pivotal importance in terms of providing and creating jobs, earning of foreign exchange with the help of exports and fulfilling the local consumption requirements. The company has more than 150 workers and executives working directly and indirectly. The companys major importing countries are France, Australia and Dubai.

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Bibliography
Managerial Economics [Book] / auth. Petersen Lewis, Jain. - [s.l.] : Prentice Hall, 2008. - Vol. fourth edition.

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