Fly Ash Brick Project: Feasibility Study Using CVP Analysis By: Jeremy Ruiz, Tomás Thomas, and Travis Hookham 1. Classify Classify the company’ company’ss costs/expens costs/expenses es into fixed fixed costs, costs, variable variable cost and initia initiall investment. investment. Fixed costs: No matter how much volume the company produces, it will have to pay these costs.
!ncluded Ra"iv #harma in personnel cost $ecause he will work %ull time as the pro"ect mana&er Financial Structure:
'e are includin& the %inancial cost as part o% our %i(ed cost %or this pro"ect Variable costs: )ependin& on the production volume, the company will pay a varyin& amount o% operatin& cost per month. The ta$le $elow is $ased on a production volume o% *++,+++ $ricks per month
Initial Investent:
2. Find the breaeven point and plot a C!" #raph.
To cover operatin& and %inancin& costs, the ly -sh Brick ro"ect needs to sell /01,+++ $ricks per month.
(
95,000 + 210,000 + 40,000 7 −4.50
)=
138,000
interest
(
¿ cost ( routine expenses + personnel cost ) + Interest cost (¿ loan ) Price per unit −Variablecost per unit
)
2 3uantity o% $ricks to $e sold per month
$. %o& many brics need to be sold so as to earn a tar#eted income of 's. 2 million per year(
!n order to achieve a tar&et income o% Rs. *,+++,+++, the ly -sh pro"ect will need to sell *,456,+++ $ricks per year. This is very close to Ra"iv #harma7s initial estimate o% demand per year.
(
2,000,000 + 1,140,000 + 2,520,000 + 480,000 7 −4.50
)=
2,456,000
Desired profit + Annual ¿ cost + Annual Interest cost 2 3uantity o% $ricks to $e sold per year ( ¿ ¿ Price perunit −Variable Cost )
). %o& do volumes affect return on e*uity(
8p to a certain amount o% production, %i(ed cost will not chan&e. Thus, the only chan&e that can a%%ect operatin& income is revenue and varia$le costs. !% a company is a$le to produce and sell a hi&her volume o% product then operatin& income will chan&e at a %aster pace. The ta$le $elow shows that a small increase or decrease in volume 9revenue or varia$le cost can lead to a lar&e increase or decrease in operatin& income. This translates into a hi&her 9or lower net income, thus a%%ectin& return on e;uity.
Units Produced and Sold @ $7.00 p/unit Units Reenue *ess +ariale Costs *ess ied Costs
Operating Income
99,000 $!9",0 00 #-7,0 0 "00,00 0 $145, 500
Percentage 108,90 119,79 Change 0 0 $7!#," $8"8, %/& '10() 00 "0 #7#,# #99,-7 %/& '10() 0 "00,00 "00,00 0.00 0 0 $190, $239, %/& 050 055 ' "0()
+. hat advice can you #ive to the o&ners(
Based on Ra"iv #harma7s initial estimated demand o% <*,4++,+++ $ricks per year, at a price o% Rs. = per $rick, the pro"ect will $e a$le to cover all o% its operatin& and %inancin& cost in the %ive year time period while earnin& Rs. *,+++,+++ per year. !% the pro"ect saves all o% its revenue %or %ive years it will accumulate to Rs. /+,+++,+++ with which the partners can pay o%% the principal on the loan and distri$ute the e;uity that was initially invested. 'ithout takin& into account the time>value o% money, this pro"ect will $reak>even a%ter %ive years.
The case discusses that the housin& sector will e(perience a *+ million to =+ million shorta&e in home units, which presents a ripe market %or demand %or the partners. !% the partners are a$le to produce closer to the plant7s capacity o% 4 million $ricks per year and take advanta&e o% this increased demand then the pro"ect is sure to turn a pro%it within a %ew years. #ince the partners can cover their operatin& and %inancin& cost at present demand and demand is pro"ected to increase in the comin& years, we su&&est the partners take a &am$le and proceed with the investment in the ly -sh ro"ect.
