Transcript

Welcome to the Lecture 4 of Week 2 of the course, Design Thinking for Agricultural Implements. We have discussed about the characteristics of the product. The three major characteristics, namely

• Purposeful characteristics
• Operational characteristics
•  And aesthetic characteristics

In the last three lectures. In this lecture I will try to discuss price to customer. This is a very important characteristic, because customer is going to pay something for that equipment to purchase. So the implement that we are designing, we need to design it in a way, so that the class of the customer or theclass of the practitioner or the farmer, those we are targeting should be able to use that and pay for that in a worthful way. In the next lecture I will cover Ease of Maintenance. Design for maintaining would also be covered. So

The Price to Customer 

• The cost of the product ordains its selling price and decides its market attractiveness.
• Product cost is a function of both variable cost such as material and labor cost, and fixed cost such as tooling and capital equipment. Now when we are talking about price and cost. Priceis something that gives you profit as well. But if the cost is high, the profit remains same, the selling price would be high. The cost of the product that you are designing has to be within the product cost, that it is designed for. I will take an example here. See this is one tractor, this is another tractor.
• Because tractors come from the range of 30 bhp to 75 bhp. So different class of the farmers would purchase different kinds of tractors depending upon the area that they are working on, depending upon the number of hours they will have to continue work upon, and depending upon the output they require, they might even send equipment or the tractor on lease. So depending upon that they purchase the product. When we design any agricultural implement. First thing is we think of is what class of the customer would use that. So that is very important

So for that the elements of the farm machines can be seen. And these are divided into two major parts.

• One is fixed cost
• Second is variable cost.

Fixed costs include depreciation, interest, taxes, insurance and housing facilities. It is very interesting to know, when a farmer purchase something. Let me say he has purchased an implement costing 1 Lakh rupees. If we are considering that as purchase price. I will put P as purchase, then S as salvage. So generally the term ‘life cycle costing of the product’ is P+O –S. O is operating cost. So salvage value is very important to determine the cost of the product as well. What is salvage, what would a second hand product, what would the economic life of a product, a service life of a product. For that, I will cover this in detail when I will discuss about depreciation.

Variable costs include repairs and maintenance, fuel, lubrication, operator-labor and timeliness cost. So let us discuss about the fixed cost in detail.

• The first element of fixed cost is depreciation. What is depreciation? Depreciation is the reduction in the cost of the equipment with time. There is some obsolescence. There is some usage of the equipment or the machineries that is being used by the farmers or the practitioners. So each year there is some reduction in the value of the product. So the next year the product further deteriorates. So each year some depreciation is happening. So there is a rate of depreciation. So this rate of depreciation can be dynamic, it can be linear, depending upon the equipment that is being used. But yes after complete depreciation for the whole life of the product, there is a salvage value.

So depreciation can be calculated as D= P-S (Purchase value minus salvage value) per unit age. So it is interesting to note here that when I am talking about age, generally the product is designed for its service life. Like you can consider the life of a tractor or any vehicles. Those are designed for 15 years. A general agricultural implement is generally used for 5 to 10 years. Okay if I am talking about vehicles. Vehicles are designed for 15 years because the road tax that you pay is for 15 years. After 15 years it cannot legally run, though the farmers are running that in the fields, it’s okay, but the legal way to run it is for 15 years only, that is it’s service life.

But there is another term known as economic life. What is economic life? Economic life is when you are running the product that age, for the economic life in a productive. In a productive, in a sense that for instance; for 5 years you have purchased a specific tractor. The new technology comes. The new technology comes and the new tractor if you purchase, that might save your value, that might save your cost. So that is economic life. Generally it is seen, it is a trend there that the farmers who can afford, they trade their tractors in 10 to 12 years. In 8-12 years generally that has been seen. So this age can be your economic life. This can also be your service life. So depreciation is a cost resulting from, wear, obsolescence and age of a machine.

The degree of mechanical wear may cause the value of a particular machine to be above or below the average value of similar machines, when it is traded or sold. Like the tractor that is being used very heavily, intensive use is there. That might get a lower salvage value. That is very less used might get a higher salvage value. In comparison to the average value after 10 years. If I consider this that as my economic life. To study economic life and service life on when to replace the tractors. There is a concept known as replacement analysis. We might share the notes for that. You may read that for further information on when to replace the equipment.

Next element is interest or opportunity cost. Interest on borrowed money is the opportunity cost for the owned capital. The farmer if they take any loan. The lender; banks or any private lender, they put some interest on that. That is also considered fixed cost. If they had used their own money, there is no interest. Opportunity cost is there. What is opportunity cost? Same amount for instance if the farmer has purchased something of Rs 1 lakh. With the same I lakh, had he or she used somewhere else, what would be the interest, what would be the profit he or she might have gained. It is opportunity cost. So this is important to be considered. This is also a part of fixed cost. Though it doesn’t seem significant, but it plays an important role.

So in general interest is calculated as. The purchase value + salvage value, divided by 2 that is average of this into I by 100. And this I is taken as from 8 to 10%.

Taxes and Insurance

Taxes to be paid and insurance of the equipment comes under the fixed cost. Whatever theequipment you purchase, each year it has to be insured. Like combines, tractors; those are big machines. Small machines like small threshers, small harvesting machines, reapers all can be insured. For that 3 year plan, 1 year plan, 5 year plan is there. For that if you pay it once in a while, in the beginning only. That comes under the fixed cost. But if you pay it yearly, that might come in the operating cost. Because each year they find what is the insurance value of this. So that comes under this taxes and insurance.

Housing Facilities 

Next is housing facilities. Cost of providing shelter, tools, maintenance equipment for machinery will result in fewer repairs in the field. So it is important to keep the equipment from the weather as well. Keep it safe from the weather and if the equipment is kept safe from the weather, the usability of the equipment improves. For that employing this housing cost is worth. So housing cost is in general 1% of purchase price. 1% of P. that may vary depending upon the different kind of implements that we are using. I took the example of crop duster vs drones. For crop duster big size housing is required, and also a long fleet is required. That also comes under this infrastructure cost only. But in case of drone, that can be flown from any place. So there is big difference in the kind of equipment that we are using with respect to the housing cost. This also comes under the fixed cost.

So totaling all these. Depreciation, interest taxes, insurance, housing facilities and the purchase cost gives us the total fixed cost.

Variable Cost 

Next is the variable cost. Variable cost as the name suggests. It is the operational cost. The cost of operating, the cost of using the equipment. Something like this. The fixed cost is something that is fixed. If I put cost here. This is cost per revenue even I can say. This is the fixed cost. The variable cost depends upon number of hours. So this is variable cost and total cost is the sum of variable cost + fixed cost.

• So in variable cost repair and maintenance is a major factor. Definitely I am going to talk about the maintenance and repair in the next lecture, when I am going to discuss the types of maintenance that is being carried out. And the design for maintainability. That is including the maintainability aspect while designing the product. That is also important. But yes repair and maintenance is there and those come in our variable cost.
• Repair and maintenance. Routine maintenance, wear and tear, accidents come under this section
• Repair cost for a particular type of machine may vary widely. By saying that vary widely. From one geographical region to another, depending upon the type of soil, rocks, terrain, climate and other conditions, it vary. And even within a local area it may vary depending upon the skill of the labor we may have, depending upon the policies which the management, or which the farmer or the agriculturalist are employing. It depends and it vary accordingly.

So variable cost as I am saying, it is variable. It might be linear like this. This is one of the ways. Or it might follow some non-linear path. Like this or something like this, but it varies.

Fuel and Lubrication 
So next is fuel and lubrication.

• Fuel and lubrication. The cost of fuel can be estimated by using average of its consumption for the field of operations. For instance tractors and some other implements. Combines or any electrical equipment. They use fuel and power. When I am talking about fuel, it automatically assumes power. So they use fuel and power for their operation. That depends upon the number of hours they are working on. So calculating the number of hours it takes for a tractor to tilling for one hectare. The cost of fuel per hectare can be calculated. So fuel cost can be estimated by using average of its consumption for field operations.
• The total cost of lubrication on a farm is take as a fraction of the fuel cost. So in general it is 15%. So 0.15 x fuel cost.
• So next is operator cost or labor cost. Labor cost is an important consideration in comparing the ownership to custom hiring. Actual hours of labor actually exceed the field machine time by 10 to 20%. Because of the travel time and the time required to service and lubricate machines. By this I mean, for instance if I hire a labor or a skilled laborer to run the tractor or run the implement. Let us think that we have given him 1000 Rs to work for 8 hours. But for the whole 8 hours we will be seeing that the machine wouldn’t be working. He will take some travel time. He will take some time off. Some time to stop, see or inspect the machine that he is working on.
  So labor rates are to be considered properly, while calculating. For the idle labor, highly skilled labor or the non-skilled labor. So that has to be considered.
• Next is timeliness cost. As it is said ‘a stitch in time saves nine’. If the crop is not delivered timely. As we know the crops are perishable. With time the quantity reduces or the quality deteriorates. So this is timeliness cost and is to be considered. So in timeliness cost the reduction in quantity or quality of crop, in case it is not processed in stipulated time is covered.
• It is generally decreasing income due to the late delivery. So timeliness cost also plays an important part.

Summing up all these fixed cost and variable cost, gives us a total cost of the product. So this cost of the product is one of the characteristics to be considered, when we are designing the implements for the farmers. I will cover the Ease of Maintenance in the next lecture, and design for maintainability, what are the kind of maintenance those are carried out. Those will be discussed in the next lecture.

Thank You.