KAMDHENU DAIRY

“Why do you maintain that FA milk is more profitable than any of one other product you produce?” Professor Puranik asked Mr. Mathias, the
general manager of the Kamdhenu dairy. Mr. Mathias replied,” This is because we incur very little overheads for this product as compared to
others; for instance we have no advertising or other promotional expenditure for this product. The production process is very simple and the
product has assured success. However, you can study our costs for all the products we produce and satisfy yourself about the validity of my
statement. I am sure you will come to the same conclusion as I have reached after many years of experience in the industry.” This was the
discussion that took place between Mr. Mathias and two professors of a leading Management institute. In April 1964 the two professors visited
the dairy to study the problems it had faced concerning the supply of FA milk to the state Government of a large state in Western India.

The Kamdhenu Dairy was located in Sanand, a small town on the railway line connecting loading cities in Western India. The dairy was started
mainly to provide better marketing facilities to the farmer for marketing the milk they produced. In the year 1945 the state government of
western state started a milk scheme for the supply of milk in a major city of the state. According to this scheme, milk was to be collected from
the Kheda district in the city mentioned above. During the initial stages of the scheme the collection of milk was left to collectors. And private
diaries with the result that very little of the increase in the price offered by the state government was received by the farmers. In order to get the
benefit of increased prices, the farmers decided to start a union of milk producers and a central processing unit at Sanand. It was decided that this
union would collect the milk from the farmers, pasteurized it and sell it to the State Government. A building and some old machinery belonging
to the government of India was leased by the union, top start a pasteurizing unit at Sanand. This marked the beginning of the Kamdhenu Dairy.
From June 1948, the dairy started pasteurizing about 250 litres of milk per day. The cooperative movement amongst milk producers became very
popular, and the organization grew at a very rapid rate. In 1953 it was found that the state milk scheme could not accept all the milk collect by
the union during the winter months. This was because the state scheme required that the state should be supplied more or less constant quantity
of milk, while the production of milk in the Kheda District varied widely between the summer and the winter seasons. In winter the production
was 250 % of the summer production. This left the Kamdhenu dairy with two alternatives:

1. Either to restrict drastically the collection of milk during the Winter months; or
2. To find alternative ways of consuming the surplus milk collected in winter months.

The first alternative was not satisfactory, as the farmers wanted to be assured of a year round market for all he surplus milk they desired to sell.
In order to assure the farmers a year round market, the management of Kamdhenu Dairy decided to construct a dairy factory to convert milk into
milk products. It obtained assistance from UNICEF and the Government of New Zealand and with the investment of Rs. 50 lakhs a factory was
put into operation from October 1955.
The opening of the dairy gave great incentive to milk production in the Kheda district. And the union was able to procure more and more milk
each year. The progress of the union after the new factory was built is illustrated in Exhibit 1.

The milk collected by the Kamdhenu Dairy was converted into the following main products:

1. FA milk for the state Milk Scheme.

2. Butter
3. Ghee
4. Skim Milk powder
5. Baby Food
6. Cheese

Exhibit 2 gives the production processes for these products and the quantities in which they were produced during the financial year 1963-64.

In early 1964 Mr. Shrivastava, the Asst. General Manager of the Kamdhenu Dairy attended a management development Programme organised
by the management Institute already mentioned above. During this programme he discussed with a senior Professor of the Institute, the problem
he faced in deciding the quantity of the FA milk that should commit to supply the state milk scheme. The difficulty had arisen because of the
variation and uncertainty involved in the procurement of raw milk. The Professor asked him to contact Professors S. Purnik and D.K. Mehta,
who were interested in problems of this nature.

In April 1964 the two Professors visited the Kamdhenu Dairy and met Mr. Mathias and Mr. Shrivastava to understand the nature of the problem.
Mr. Shrivastava explained the problem as under:

“Milk supply from our societies is at its minimum in the month of June and reached its maximum in December-January. Though this variation is
known, it is impossible to predict with certainty the quantity of milk that we will be able to procure in the lean and the peak periods. Ideally we
would like to vary our supply of FA milk to the state Milk Scheme according to the variation of our milk procurements. Unfortunately our
contract terms do not permit us to do so. According to the contract we have to supply them with more or less a uniform quantity of FA milk
throughout the year. In case we fail to supply the requisite quantity we have to pay a penalty at the rate of 8 Rs. for every litre that falls short of
the contracted quantity. You must remember that FA Milk is the most profitable product that we make. In case we contract too little too small a
quantity with the state because of the fear of not being able to supply it in summer we lose profit. On the other hand if we contract too large a
quantity we have to pay a penalty. In a view of this, I would like to know what is the optimum quantity that I should settle for.”
At this point, Professor Puranik asked Mr. Mathis the question stated at the beginning of the case. As the question of profitability of the various
products was very important in this problem, the two professors decided to examine the cost structure of the various products and ascertain the
profitability of each product.

Mr. Mathis suggested that Mr. Shrivastava, Mr. Ramaswami, the accountant, and the two Professors get together, so that Mr. Ramaswami could
explain the cost structure of various products. At a subsequent meeting, Mr. Ramaswami presented the statement given in Exhibit 3 and made
the following comments.

“We find that our contention that FA milk is the most profitable product is borne out of facts. You will notice that in other products, except for
whole milk powder and FA milk, we are either breaking even or losing money. Consider cheese for example, Mr. Shrivastava‟s favourite
product. In estimating the profitability of this product, I have not accounted for the expenditure that we incurred for development of this product
and yet we are losing heavily on cheese, I am wondering why we should not drop this product. As for baby food, we do not make any money,
but as Mr. Mathias says. We are a cooperative society and must look for the welfare of people in general, and should not merely concentrate on
profit. For your information, this is our prestige product. However, I must say the concept of defining alternatives as I have used in the statement
was something which I learned from discussions with the professors. Formerly we use to evaluate profitability of products individually rather
than of combinations which is the correct way of looking at things from a technical as well as accounting point of view.”

At this point, Professor Puranik commented, “we are glad that you have started considering product combinations rather than individual
products. However, we are not sure as to how far the cost you have worked out is relevant for deciding the cost profitable product mix.” Mr
Shrivastava said, “Mr Ramaswami, the management bous always talk of relevant costs. At the management development programme they use to
tell us that while choosing amongst the alternatives, one should consider only the costs that had to be incurred in future and not worry about the
sunk cost. As they said, let bygones be bygones. I do not see how you can be wrong in your findings. You have not missed any relevant costs.
However, let the professor scrutinise the cost statements and advise us.” He said further to the professors “I am interested in finding out the
optimum product mix. Today we are enjoying a seller‟s market, and have no difficulty in selling all we produce. Our whole milk powder is
purchased by the government of India for defence needs, our cheese has good demand and I can hope to sell cheese at a rate of thousand tons per
year without any difficulty. In short, marketing is no problem for the present and I think the conditions will remain the same for some time to
come. Our only constraints are production capacity (listed in Exhibit 5), the availability of raw milk and contractual obligation of supplying FA
milk to state milk scheme at a rate of 75,000 litres a day. You may perhaps be aware that we have a big programme for expansion. We would
like to know the direction in which we should expand.

The professors were considering what they should do next.

 Table illustrating progress made by the union from 1955-56 to 1962-63

Year ending 31st Number of societies Number of farmer Share capital of the Quantity of milk Cost of milk
march members of the union collected products sold
society (Rs) (Liters) (Rs)
Position before new dairy was built
1955-56 64 22,828 2,17,400 1,11,36,343 76,36,000

Position after new dairy was built

1956-57 107 26,795 3,61,500 1,41,64,000 1,88,47,000
1957-58 130 29,003 3,93,900 2,11,56,400 1,34,47,000
1958-59 168 33,068 4,73,500 2,75,57,800 2,11,65,000
1959-60 167 40,181 5,67,100 2,29,27,000 1,82,10,000
1960-61 195 40,500 7,41,100 2,35,13,000 1,98,33,000

Position after the dairy was expanded for baby food and cheese
1961-62 219 46,400 7,48,700 6,53,98,429 3,15,28820
1962-63 254 58,400 8,19,200 5,04,17,8112 4,56,24,311
Exhibit 2
2.1

The raw material recieved daily from contributing farmers at weighing scales (1) goes into raw milk tanks (2) the milk is then conveyed
to pasteurizers (3a) and (3b). A portion of pasteurised milk is mixed with skim–milk stores in (14). Milk condensing plant and mixrure is
conveyed to insulated railway milk tanks (5) as FA milk. The remaning quantity of pasteurized milk is stored in insulated milk tanks (4)
to be processed into the three main products, viz. Butter, ghee, and skimmed milk powder and the two by-producys, viz. Case in lactose.

BUTTER
From the storage tanks 40 the milk is conveyed to cream seperators (6) to be seperated into cream and skim milk. The seperated cream is
then conveyed to the vacreator (7) and the vacreated cream to the cream cooler (8). The cooled cream is conveyed to Jacketted cream
ripening vats (9) and then to the butter chrun (10) where the butter is made, and brought to the butter wrapping machine (11). The
finished product is then stocked in the cold store (12) and is ready for market.

GHEE
Butter when it comes out of butter chrun (10) is conveyed to th e gheee pa (13) and stocked in cold store (12) ready for the market.

SKIMMED MILK POWDER

The seperated skim milk from the cream seperators (6) is conveyed to the milk condensing plant (14). The condensed skim milk is
conveyed to the milk drying plant(15) and the dried skim milk is conveyed to the milk powder filling machine (16). The finished product
is taken to the powder store (17) and is ready for the market.
2.2

Production of milk products in 1963-64

A. Total milk received from societies : 60430000 litres (See Exhibit 5)

B. Production (1000 Rs.)
a. FA milk : 35519
b. Standardized Milk : 1362
c. Baby Food : 1839
d. Butter : 1385
e. Whole milk powder : 569
f. Skimmed milk powder : 224
g. Ghee : 398
h. Chesse : 81
 Exhibit 3
Statement showing profitabilty of different products

Alternatives Revenue from Net

Profit
Main Product By Qty of Qty of Qty in Cost Proces- Allocated Total Main By Total Total
product raw litres/kg kg of of sing & overhead product product
S. milk of main by milk1 packing cost3
No used (in product product cost2
litres)
1. FA milk Butter 10,000 9874(L) 62 6953 500 130 7583 7553 403 7956 373
2. `` Ghee 10,000 9874(L) 48 6953 551 130 7634 7553 399 7952 318
3. Skimmed Butter 10,000 813(K) 992 6953 1285 699 8937 2334 6448 8782 -155
Milk Powder
4. `` Ghee 10,000 813(K) 756 6953 1301 699 8953 2334 6275 8609 -344
5. Whole Milk Butter 10,000 1179(K) 606 6953 2000 598 9551 5876 3987 9863 312
Powder
6. `` Ghee 10,000 1179(K) 448 6953 2000 598 9551 5876 3822 9698 147
7. Baby- Food Butter 10,000 1307(K) 696 6953 4478 988 12419 7772 4524 12295 -123
8. `` Ghee 10,000 1307(K) 529 6953 4494 988 12435 7772 4308 12080 -355
9. Cheese Butter 10,000 1094(K) 560 6953 3864 6581 17390 9010 3640 12650 -4749
10. `` Ghee 10,000 1094(K) 426 6953 3983 6581 17517 9010 3536 12546 -4971
11. Standardized Butter 10,000 8675(L) 681 6953 1052 427 8432 4338 4426 8754 332
Milk
12. `` Ghee 10,000 8675(L) 519 6953 1060 427 8440 4338 4307 8545 205
1
Cost of milk is taken to be Rs. 0.6953 per litre.
2
Includes (1) Cost of utilities in processing like cost of electricity, steam etc.
(2)packaging cost and other material cost, e.g. , of salt, sugar, colour etc.
3
Refer Table 2 Exhibit 4 for explanation.
 Exhibit 4
Table 1

Statement Showing Overhead Costs and Allocated Overhead Costs per Unit of Product for the year 1963-64

Milk Products 1963-64 Production Labour Costs* Depreciation** Advertising `00000 Total Allocated overhead cost
`00000 `00000 `00000 `00000 per unit of production 6/2
units Rs. Rs.

1 2 3 4 5 6 7
FA Milk 344 (L) 1.0 2.1 - 3.1 0.01
Butter 13.9 3.0 2.2 1.75 6.95 0.50
Baby Food 18.4 3.0 0.9 5.20 9.1 0.49

Cheese 0.8 2.0 0.9 1.75 4.65 5.76

S.M.P. 2.2 kg - 2.0 - 2.0 0.25
W.M.P. 5.7
Total 9.0 8.10 8.70 25.80

*Total labour cost is distributed to the different products on the basis of labour used. The labour force and wage structure are not affected by
change in product mix and hence labour costs are accounted as overhead costs.

** Allocated on the basis of the machine capacities used for manufacturing different products in the year 1963-64.
 Exhibit 4 (contd.)
Table 2
Table showing allocation of overhead costs to the alternatives in Exhibit 3
Sr. Main Product(1) By Qty. of Qty. of by- Allocated overhead cost Allocated overhead Allocated
No. Product(2) Main products (in per litre/kg of main cost per litre/kg of overhead cost
Products(3) kg)(4) product (Rs.)(5) by- product (Rs.)(6) (Rs.)(7=3*5+4*6)

1 FA Milk Butter 9874 (L) 62 0.01 0.50 130

2 FA Milk Ghee 9874 (L) 48 0.01 0.66 130

3 S.M.P. Butter 813 (K) 992 0.25 0.50 699

4 S.M.P. Ghee 813 (K) 756 0.25 0.66 699

5 W.M.P. Butter 1179 (K) 606 0.25 0.50 598

6 W.M.P. Ghee 1179 (K) 448 0.25 0.66 598

7 Baby Food Butter 1307 (K) 696 0.49 0.50 988

8 Baby Food Ghee 1307 (K) 529 0.49 0.66 988

9 Cheese Butter 1094 (K) 560 5.76 0.50 6581

10 Cheese Ghee 1094 (K) 426 5.76 0.66 6581

11 Standardized Milk Butter 8675 (L) 581 0.01 0.50 427

12 Standardized Milk Ghee 8675 (L) 519 0.01 0.66 427

 Exhibit 5
Table 1

Production Capacities of Different Milk Products

Sr. No. Product Production Capacity per Day

(kg)

1 Butter 10000**

2 Ghee 2500

3 Milk Powder 6000*

4 Baby Food 7000

5 Cheese 2000

*Powder-drying capacity

**All the butter reqd. for making ghee must come from the butter churns
Table 2
Month-wise collection of milk for the year 1963-64
Year Month Actual Milk Collection in „00000 litres

1963 April 48.1

1963 May 40.5

1963 June 31.3

1963 July 32.8

1963 August 41.8

1963 September 46.3

1963 October 53.0

1963 November 60.7

1963 December 67.7

1964 January 65.0

1964 February 58.0

1964 March 59.1

Total 604.3

Contractual Obligations Table 3

FA milk to be supplied to the State Milk Scheme at the rate of 75,000 litres per day.
 Supplement of the Case Kamdhenu Dairy

The discussion of the case Kamdhenu Dairy will be facilitated a great deal if there is some uniformity in the computations. In order to achieve
this uniformity it is suggested that we define as follows the units for the various products.

With the help of Exhibit 3, it can be seen that 10,000 litres of raw milk would be required for producing each of the following 12 alternatives:

S.No. Alternatives Corresponding to 1000 litres of Raw Milk

Qty. of main product Qty. of by-product in kg
1 FA Milk + Butter 9874 (L) 62
2 FA Milk + Ghee 9874 (L) 48
3 S.M.P. + Butter 813 (K) 992
4 S.M.P. + Ghee 813 (K) 756
5 W.M.P. + Butter 1179 (K) 606
6 W.M.P. + Ghee 1179 (K) 448
7 Baby Food + Butter 1307 (K) 696
8 Baby Food + Ghee 1307 (K) 529
9 Cheese + Butter 1094 (K) 560
10 Cheese + Ghee 1094 (K) 426
11 Standardized Milk + Butter 8675 (L) 581
12 Standardized Milk +Ghee 8675 (L) 519
Let us define:

1. 10000 litres of Raw Milk : 1 unit of Raw Milk

2. 1000 kg of butter : 1 unit of butter

3. 1000 kg of ghee : 1 unit of ghee

4. 9874 litres of FA milk : 1 unit of FA milk

5. 813 kg of S.M.P. : 1 unit of S.M.P.

6. 1179 kg of W.M.P. : 1 unit of W.M.P.

7. 1307 kg of baby food : 1 unit of baby food

8. 1094 kg of cheese : 1 unit of cheese

9. 8675 litres of : 1 unit of standardized milk

standardized milk

E.g. in these units, one unit of raw milk yields one unit of chesse and 056 units of butter. In terms of these units, the capacity restraints can be
defined as under:-

Product Production Capacity (kg/day) Units

Butter 10000 10
Ghee 2500 2.5
Milk Product 6000 7.38 S.M.P. or 5.09 W.M.P.
Baby Food 7000 5.36
Cheese 2000 1.83 of cheese
The Following Questions Would Help Us In The Analysis Of This Case.

However, the discussion need not be confined only to these questions.

1. Should cheese be dropped from the product line as suggested by Mr. Ramaswami?
2. Let us assume that the dairy would be able to produce raw milk as under:
Time Units /day
May to August 11.9
September to April 19.0
In view of this supply position what should be the production programme for the Dairy if:

a. It had no contractual obligations to supply FA milk to the state milk Scheme?

b. In case you were negotiating a contract with the state what quantity of FA milk would you commit to supply?
c. In case the dairy was planning to expand its butter churning and powder drying capacity, how much money should it invest in these
expansions?
d. Find out FA milk supply throughout year