FLY ASH BRICK PROJECT: FEASIBILITY

STUDY USING CVP ANALYSIS

SUBMITTED BY:
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 CONTENTS

Part 01 Part 02 Part 03 Part 04

Classifications
Case Introduction CVP Analysis Recommendation
& Findings
 01
Case Study Analysis
01 Executive Summary

Fly Ash Brick Project

The brainchild of Rajiv Sharma (“Sharma”), which

involves themanufacturing and selling of bricks made out
of fly ash, a residue obtained from combustion of coal
which is widely available in India due to the high
utilisation of coalin the production of thermal power, its
major power generation source.

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01 Given Data in the Case Study
01 Given Data in the Case Study
01 Given Data in the Case Study
 02
CVP Analysis

Cost-volume-profit (CVP) analysis is used to

determine how changes in costs and volume
affect a company's operating income and net
income.
01 In performing this analysis, there are several assumptions made, including:

a. Sales price per unit is c. Total fixed costs are e. Costs are only affected
constant constant because activity changes

b. Variable costs per unit

d. Everything produced is sold
are constant

The break-even point represents the level of sales where net income equals zero. In other
words, the point where sales revenue equals total variable costs plus total fixed costs, and
contribution margin equals fixed costs.
01 Key Takeaways...
CVP Analysis

Cost-volume-price analysis is a
way to find out how changes in
variable and fixed costs affect a
firm's profit

Profit Margin

Companies can use the formula result

to see how many units they need to
sell to break even (cover all costs) or
reach a certain minimum profit
margin
 03
Classification & Findings

It is critical to know that how much the company would

have areturn on equity and that whether the company
would be able to meet its debt obligations that it is
supposed to take amortgage loan from the bank.
 Classifying the company's costs/expenses into fixed costs, variable cost and initial
01 investment.

Fixed Cost :No matter how much volume the company produces, it will have
to pay these costs

**Included Rajiv Sharma personnel cost becasue 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 oerating cost per
month.
Initial Investment :
02 Finding the breakeven point and plotting 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 + 40,000

= 138,000
7- 4.50

Fixed cost(routine expenses + personnel cost) + Interest cost (Interest from loan)
= Quantity of bricks
Price per unt - Variable cost per unit to be sold per month
 How many bricks need to be sold so as to earn a targeted income of Rs. 2 million per
03 year?

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

Desired profit + Annual fixed cost + Annual interest cost

= Quantity of bricks
Price per unt - Variable cost to be sold per year

2,000,000 + 1,140,000 + 2,520,000 480,000

= 2,456,000
7- 4.50

04 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.
 04
Recommedation

What advice we can give to the owners based on

their
FINAL DECISION.
 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 yeartime period while earning Rs. 2,000,000 per year.

If the project saves all of its revenue for fiveyears 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 timevalue of money, this
project will break-even after five years.

...HENCE...
 • The case discusses that the housing sector will
experience a 20 million to 70 million shortage inhome
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
Add your title Add your title is sure to turn a profit
Addwithin a few years.
your title

Add your title Add your title

Add
Since the partners your
can title their operating and financing cost at present demand and demand is
cover
projected to increase in the coming years, we suggest the partners take a gamble and proceed
with the investment in the Fly Ash Project.

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Thank You