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.

Routine Expenses Cost Per Month Cost Per Year Cost for Five Years
Building Rent 50,000 600,000 3,000,000
Administrative Cost 10,000 120,000 600,000
Offi ce Supply 5,000 60,000 300,000
Electricity 10,000 120,000 600,000
Miscellaneous 20,000 240,000 1,200,000
Total Rs 95,000 Rs 1,140,000 Rs 5,700,000
X

Personnel Cost Cost Per Month Cost Per Year Cost for Five Years
Workers 100,000 1,200,000 6,000,000
Offi ce Assistant 20,000 240,000 1,200,000
Watchman 15,000 180,000 900,000
Drivers 25,000 300,000 1,500,000
Sharma as Production Manager 50,000 600,000 3,000,000
Total Rs 210,000 Rs 2,520,000 Rs 12,600,000
***Included Rajiv Sharma in personnel cost because he will work full time as the project manager

Financial Structure:
Initial Investment: Rs 10,000,000
Equity 6,000,000 Monthly Interest on Loan Annual Interest on Loan 5 Year Interest on Loan
Loan 4,000,000 40,000 480,000 2,400,000
***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

Expenses Related to Volume of Production Cost Per Month Cost Per Unit Cost Per Year Cost for Five Years
Fly Ash 250,000 1.25 3,000,000 15,000,000
Gypsum 250,000 1.25 3,000,000 15,000,000
Lime 300,000 1.50 3,600,000 18,000,000
Sand 40,000 0.20 480,000 2,400,000
Electricity 10,000 0.05 120,000 600,000
Labor 50,000 0.25 600,000 3,000,000
Total Rs900,000 Rs4.50 Rs10,800,000 Rs54,000,000

Initial Investment:
 Estimated Investment in Indian Rupees
Building Modification 1,400,000
Water Supply Arrangements 100,000
Machinery 2,000,000
Trucks 3,000,000
Payload Machine 1,500,000
Total Rs 8,000,000
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
¿ cost ( routine expenses+ personnel cost ) + Interest cost (interest ¿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+2,520,000+480,000
7−4.50 )=2,456,000
( Desired profit + Annual ¿ cost + Annual Interest cost¿ ¿ Price per unit −Variable Cost ) = Quantity of
bricks to be sold per year

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                              
99,000 108,900 119,790 Change
$693,00 $762,30 $838,53
Revenue         +/- (10%)
0 0 0
Less Variable Costs 247,500 272,250 299,475         +/- (10%)
Less Fixed Costs 300,000 300,000 300,000           0.00
$145,50 $190,05 $239,05
Operating Income           +/- ( ~30%)
0 0 5

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.
Revenues per year Rs 2,000,000

5 year estimate of Revenue Rs 10,000,000

less 4M loan 4,000,000
less 6M Initial investment from Partners 6,000,000
Total Revenue after five years Rs 0
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.