Fly Ash Brick Project: Feasibility Study Using CVP Analysis

By: Jeremy Ruiz, Tomás Thomas, and Travis Hookham

1. Classify the company’s costs/expenses into fixed costs, variable cost and initial investment.
Fixed costs:
No matter how much volume the company produces, it will have to pay these costs.

***Included Rajiv Sharma in personnel cost because he will work full time as the project manager

Financial Structure:

***We are including the financial cost as part of our fixed cost for this project

Variable costs:
Depending on the production volume, the company will pay a varying amount of operating cost per month. The table
below is based on a production volume of 200,000 bricks per month

Initial Investment:
2. Find the breakeven point and plot a CVP graph.

To cover operating and financing costs, the Fly Ash Brick Project needs to sell 138,000 bricks per month.

( 95,000+210,000+
7−4.50
40,000
)=138,000
interest

( ¿ cost ( routine expenses+ personnel cost ) + Interest cost (¿loan)

Price per unit−Variable cost per unit ) = Quantity of bricks to

be sold per month

3. How many bricks need to be sold so as to earn a targeted income of Rs. 2 million per year?

In order to achieve a target income of Rs. 2,000,000, the Fly Ash project will need to sell 2,456,000 bricks per year.
This is very close to Rajiv Sharma’s initial estimate of demand per year.

( 2,000,000+ 1,140,000+
7−4.50
2,520,000+480,000
)=2,456,000
 Desired profit + Annual
¿ cost+ Annual Interest cost = Quantity of bricks to be sold per year
( ¿ ¿ Price per unit −Variable Cost )

4. How do volumes affect return on equity?

Up to a certain amount of production, fixed cost will not change. Thus, the only change that can affect operating
income is revenue and variable costs. If a company is able to produce and sell a higher volume of product then
operating income will change at a faster pace.

The table below shows that a small increase or decrease in volume (revenue or variable cost) can lead to a large
increase or decrease in operating income. This translates into a higher (or lower) net income, thus affecting return on
equity.

Units Produced and Sold @

$7.00 p/unit
Percentage
Units 108,90 119,79
99,000 Change
0 0
$693,0 $762,3 $838,5
Revenue +/- (10%)
00 00 30
247,50 272,25 299,47
Less Variable Costs +/- (10%)
0 0 5
300,00 300,00 300,00
Less Fixed Costs 0.00
0 0 0
$145, $190, $239, +/-
Operating Income
500 050 055 ( ~30%)

5. What advice can you give to the owners?

Based on Rajiv Sharma’s initial estimated demand of ~2,400,000 bricks per year, at a price of Rs. 7 per brick, the
project will be able to cover all of its operating and financing cost in the five year time period while earning
Rs. 2,000,000 per year. If the project saves all of its revenue for five years it will accumulate to Rs. 10,000,000 with
which the partners can pay off the principal on the loan and distribute the equity that was initially invested. Without
taking into account the time-value of money, this project will break-even after five years.
The case discusses that the housing sector will experience a 20 million to 70 million shortage in home units, which
presents a ripe market for demand for the partners. If the partners are able to produce closer to the plant’s capacity
of 4 million bricks per year and take advantage of this increased demand then the project is sure to turn a profit within
a few years.
Since the partners can cover their operating and financing cost at present demand and demand is projected to
increase in the coming years, we suggest the partners take a gamble and proceed with the investment in the Fly Ash
Project.