# Difference between revisions of "Estimation of production cost and revenue"

## Variable Cost of Production

Variable costs of production are dependent primarily on plant output and rate of production. There are many variable to consider when costing a plant.

1. Raw materials consumed
2. Utilities-steam, electricity, cooling water, fuel, etc.
3. Consumables - acids, bases, solvents, catalysts, etc.
4. Disposal
5. Shipping

Variable costs can be greatly cut through optimization techniques and intelligent plant design [1].

### Estimating Variable Production Costs

The majority of the variable costs for a production plant are the raw materials and utilities costs.

#### Raw Materials Cost

Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD [6].There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities [1]. Finding may prove that a process is less efficient than it originally claimed. It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP).

#### Utilities Cost

These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD [6]. This includes:

• Fuel gas, oil, or coal
• Electric power
• Steam
• Cooling water
• Process water
• Boiler feed water
• Air
• Inert gas
• Refrigeration

#### Waste Disposal Costs

These are defined as the cost of waste treatment to protect the environment [6].

## Fixed Cost of Production

### Estimating Fixed Production Costs

#### Labor Costs

These are the costs attributed to the personnel required to operate the process plant [5].

#### Maintenance Costs

Part of these costs are associated with labor and materials necessary to maintain plant production [5].

#### Research and Development

These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies [5].

## Revenues

The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.

### By-Product Revenues

Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product.

By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process:

1. Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.
2. Components that are produced in high yield by side reactions.
3. Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.
4. Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.
5. Degraded consumables (e.g. solvents, etc.) that have reuse value.

A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than \$200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost [1].

### Margin

The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost.

Gross margin = Revenues - Raw materials costs

Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher [1].

### Profits

There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs.

CCOP = VCOP + FCOP

where VCOP is the variable cost of production and FCOP is the fixed cost of production.

Gross profit, which should not be confused with gross margin, is then calculated by the following equation,

Gross profit = Main product revenues - CCOP

Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in.

Net profit = gross profit - taxes

## Pricing Products and Raw Materials

The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations.

### Pricing Fundamentals

The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa.

### Price data Sources

There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes.

#### Internal Company Forecasts

Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire.

Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.

There are also many publications that report pricing data weekly. ICIS Chemical Business Americas used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. Oil and Gas Journal publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. Chemical Week provides the spot and contract prices for 22 chemicals in the US and European markets.

#### Consultants

If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: Purvin and Gertz, Cambidge Energy Research Associates, Chemical Markets Associates Inc., and SRI: The Chemical Economics Handbook

#### Online Brokers and Suppliers

Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.

## References

1. Towler, G.P. and Sinnot, R. (2012). Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design.Elsevier.
2. Biegler, L.T., Grossmann, L.E., and Westerberg, A.W. (1997). Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice-Hall.
3. Peters, M.S. and Timmerhaus, K.D. (2003). Plant Design and Economics for Chemical Engineers, 5th Edition. New York: McGraw-Hill.
4. Seider, W.D., Seader, J.D., and Lewin, D.R. (2004). Process Design Principles: Synthesis, Analysis, and Evaluation. New York: Wiley.
5. Turton, R.T., Bailie, R.C., Whiting, W.B., and Shaewitz, J.A. (2003). Analysis, Synthesis, and Design of Chemical Processes Upper Saddle River: Prentice-Hall.