Professional Documents
Culture Documents
Page
Introduction 1
Problem Statement 1
SWOT Analysis 2
Analysis and Computation 3
Fixed Cost 3
Financial Structure 4
Variable Cost 7
Cost-Volume Profit Analysis (CVP) 7
Break-Even Analysis (BEA) 9
Target Profit Analysis 9
The Alternative Production Options 11
Discussion 11
Recommendations 12
Conclusion 12
References 13
1. Introduction
Fly Ash brick business is a business plan that is Rajiv Sharma’s dream project. Rajiv
Sharma has proposed this project to his friend Alok Gupta since he believes it has potential to
generate huge profit. Alok Gupta is interested in the idea but he is uncertain in the feasibility
of the business.
Sharma was trying to convince his friend, Alok Gupta about the doable of the project.
Since it is easy an easy access to the raw materials in India, since India has huge qualities of
coal to produce thermal power, which is the power generation source. When coal is being
pulverized to generate heat, the residual products contains up to 80 percent fly ash. Also, the
government is keen on promoting the fly ash bricks into the construction sector due to the
shortage of the availability of different types of building materials. There are also benefits of
using fly ash brick. Instead of using clay brick using fly ash bricks will help preserve the
fertility of soil.
New innovation has been developed by the National Thermal Power Corporation
(NTPC) where the burnt clay bricks can be replaced by fly ash as a construction material for
building walls. The government encourages the manufacturing of fly ash bricks. The
manufacturing process for the fly ash brick need to have a mixture of 60 to 80 percent of fly
ash, 10 percent of sand, 10 percent gypsum and 10 to 20 percent of lime.
The life of the project is five years and Rajiv Sharma will work full time as production
manager. The investments in the working capital will be recovered in full. Rajiv Sharma
believes that the business will be successful since India is opening up this market and it will be
easy for them to find suppliers
2. Problem Statement
Rajiv Sharma’s longtime friend Alok Gupta has some worries regarding the feasibility
of the project. Even after Rajiv Sharma has explained the opportunities and potential of the fly
ash business, Alok Gupta has doubts lingering on his mind.
Since the project requires a lot of capital, 8 million to be able to rent plant, purchase machinery,
trucks, raw materials and other costs.
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Sharma and Gupta will invest 6 million in the business and loan 4 million from the bank. This
is enough for them to start the business. Gupta wanted to be more certain about the feasibility
of the project, therefore they decided to hire a consultant to evaluate their plan.
3. SWOT Analysis
Strengths
▪ Expertise in construction Industry
▪ LEED: You can be the LEED (Leadership in energy and environmental design),
you gain points by using the greener materials.
▪ Government support: Since the government wants to change from using clay brick
to fly ash, it will be easier for the company to get the approval
▪ Environmental Friendly: The fly ash brick can keep the soil fertile
▪ The volume of fly ash brick can serve the demand of the housing construction
▪ Potential: The project is a big potential because there isn’t a lot of competitors in
the market yet.
▪ Production process: Easy and Inexpensive
Weaknesses
▪ Investment: Initial investment is a lot, $8 million rupees
▪ Strength: Fly ash brick is not as strong as the clay bricks
▪ Entrepreneur: Never had a business before, so it might be difficult to run one
▪ Short term project: The number of years of this project is short.
Opportunities
▪ Availability of fly ash: Since India utilizes a huge quantity of coal to produce
thermal power, and when the pulverized coal is burned to generate heat, the residual
product is contained up to 80% of fly ash
▪ Helping the government: Since the government wants to solve the issue with the
disposable of fly ash brick and the environmental issue, giving them a hand will be
a win win situation for both parties.
▪ Mass media coverage: Since helping the government to take on their idea and
producing it
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Threats
▪ Unpredictable demands: The uncertainty of the amount of fly ash available in the
market
▪ Economic Crisis
▪ Emerging Competitors: Competitors in the future that might come up and give for
lower prices
Fixed cost is when the cost remains fixed throughout the production period,
regardless of the level of production. A fixed cost is a cost that does not change with an
increase or decrease in the amount of goods or services produced or sold. They are expenses
that have to be paid by a company, independent of any business activity.
The formula of fixed cost is:
Fixed Costs (FC) + Variable Costs (VC) = Total Costs (TC)
Routine Expenses Per month (Rs) Per Year(Rs) Total for 5 years (Rs)
Building Rent 50,000 600,000 3,000,000
Administrative cost 10,000 120,000 600,000
Office Supply 5,000 60,000 300,000
Electricity 10,000 120,000 600,000
Miscellaneous 20,000 240,000 1,200,000
Total 95,000 1,140,000 5,700,000
Table 1 Routine Expenses
The Table 1 represents the routine expenses. It is the routine cost that occur during the
time or during period of time. The total routine expenses per month is Rs. 95,000,
approximately per year is Rs. 1,140,000 and for accumulated total for five years is
approximately Rs. 5,700,00.
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Personal Per Year Total for 5
Expenses Per month(Rs) (Rs) years(Rs)
Workers 100,000 1,200,000 6,000,000
Office assistant 20,000 240,000 1,200,000
Watchman 15,000 180,000 900,000
Drivers 25,000 300,000 1,500,000
Sharma himself 50,000 600,000 3,000,000
Total 210,000 2,520,000 12,600,000
The Table 2 represents the personal expenses. It is the personal cost during the time
period. The total personal expenses per month is Rs. 210,000, approximately per year is Rs.
2,520,000 and for accumulated total for five years is approximately Rs. 12,600,000.
Fixed Expenses Per month(Rs) Per Year(Rs) Total for 5 years (Rs)
Routine Expenses 95,000 1,140,000 5,700,000
Personal Expenses 210,000 2,520,000 12,600,000
Total 305,000 3,660,000 18,300,000
Table 3 Fixed Expenses
The Table 3 represents the fixed expenses. It shows the total amount from table 1 and
2. The total fixed expenses for fly ash brick project for per month is Rs. 305,000, approximately
per year is Rs. 3,660,000 and for accumulated total for five years is approximately Rs.
18,300,000
Financial structure refers to the specific mixture of long-term debts and equity that a
company uses to finance its operations. In this part, the breakdown of Rs. 10,000,000 capitals
for fly ash brick project will be shown.
Depreciation is to be calculated for all the property and plants. The life of the project is
estimated to be five year and initial investment is Rs. 8,000,000. The salvage value of the plant
and equipment at the end of five years are negligible. After calculating the depreciation using
the straight-line method, as shown below, we get the fixed expense of Rs. 1,600,000.
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8,000,000 − 0
𝑆𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝐿𝑖𝑛𝑒 𝑀𝑒𝑡ℎ𝑜𝑑 =
5 𝑦𝑒𝑎𝑟𝑠
= 𝑅𝑠. 1,600,000
Cost / Year
Cost/Month
Estimated Investment Yr 5
(Rs)
Yr 1 (Rs) Yr 2 (Rs) Yr 3 (Rs) Yr 4 (Rs) (Rs)
Building Modification 1,400,000
Water Supply 100,000
Machinery 2,000,000
Trucks 3,000,000
Payload machine 1,500,000
Total 8,000,000 6,400,000 4,800,000 3,200,000 1,600,000 0
Table 5 Net Book Value
From the above Table 5, which represents the Net Book Value, it can be seen that the
depreciation happens by the 4th year.
(12% annual loan rate)
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The Table 6 presents the financial plan for the fly ash brick project. From the table, it
can be seen that Sharma and Gupta will invest Rs. 6,000,000 in this project, with their own
money. As for the remaining amount, Rs. 4,000,000, they will be receiving loan from the bank
with the interest rate 12 percent.
The Table 7 represents the finance cost. Finance cost is the cost, interest, and other
charges involved in the borrowing of money to build or purchase assets. From the table it can
be seen that by year 4, the company would have paid the for all the liabilities unless it has asked
for more loan.
Calculation of Repayment
-Loan = Rs. 4,000,000
-Number of years = 5
-Repayment per year = 4,000,000 / 5 = Rs. 800,000
-Repayment per month = 800,000 / 12 = 66,667
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4.3 Variable cost
Variable cost is a corporate expense that changes in proportion with production output.
The variable cost of production is a constant amount per unit produced.
Production Cost
Cost Per unit Per Year Total for 5
(for 200,000 Per month (Rs)
(Rs/Unit) (Rs/Unit) years (Rs/Unit)
bricks)
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 900,000 4.50 10,800,000 54,000,000
The Table 8 presents the variable cost in the fly ash brick project. The unit variable cost
to product one unit of brick is Rs. 4.50 as shown below:
900,000 / 200,000 = Rs.4.5 per unit
Sharma decided that the selling price of bricks will be Rs. 7 per unit.
The variable cost per month will be Rs. 250,000. per year will be Rs. 10,800,00 and for five
years it will be Rs. 54,000,000.
CVP analysis is used to determine how changes in costs and volume affect a company's
operating income and net income. In performing this analysis, there are several assumptions
made, including:
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Using CVP analysis in this business will help to determine the break-even point of cost
and volume of goods. It will be useful for Gupta to make decisions. The formula of CVP
analysis which is derived from profit equation is:
px = vx + FC + Profit
The variables we will be using to calculate the project costs are: fixed expenses, finance costs
and variable costs per unit. The projects costs are as below:
Monthly Revenue
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4.5 Break-Even Analysis (BEA)
The purpose of BEA is to determine exactly when a business can cover all expenses
and start generating a profit. When the company’s break even, the costs and revenues are equal,
which means the company neither makes a profit or is in loss.
Since fly ash brick project is still in process, this BEA will help the shareholder to identify the
potential success or failure of the company.
Depreciation 1,600,000
Annual Expense 5,740,000
From Table 9 and the calculation above, it can be seen that in order to be balanced
(company neither makes a profit or is in loss), the company must produce 2,296,000 units of
brick per year which is equivalent to earning of Rs. 16,072,000.
TPA means the net operating income or profit that management desires to achieve at
the end of a business period. CVP formulas and equations can be used to determines the sales
volume needed to achieve a target profit. It will take into account total fixed cost, targeted
profit and unit contribution margin.
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For the fly ash brick project, the table below depicts the targeted profit.
Yr 1 (Rs)
Target Profit 260, 000
Depreciation 1,600,000
At break-even point, the production of the company capacity is 57.4%. When Sharma’s
company produces 2,296,000 bricks per year, there is no gain and no loss. However, when
2,296,000 units are sold per year, both fixed cost and variable cost are to be covered by the
revenue. The correlation between volume and cost as well as profit is that before the break-
even point, the company operated at a loss; whereas the company makes money after the break-
even point where the total profit is larger than total cost. Therefore, although the plant would
have the capability to manufacture four million, Sharma’s decision about producing 2.4 million
bricks per year based on the estimated market demand is reasonable. Because the 2.4 million
is larger than the break-even quantity, which is 2,296,000 units, the company still can generate
income of RS. 260,000.
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4.7 The Alternative Production Options
If the company wants to recover all the investment capital within the project lives,
they should produce and sell bricks at 77.4% capacity (3,096,000 bricks per year).
If the company want to go full production potential, they should produce and sell bricks at 100%
capacity (4,000,000 bricks per year).
5. Discussion
If Sharma and Gupta want to really do this project they must meet these necessary
requirements.
Firstly, Sharma and Gupta should ensure that the amount of sales are secured before the
investment. This can be done by signing contracts with various business organizations (housing
developers, government building project, etc) those in need of the fly ash bricks. This will help
them ensure that the sales will exceed the break-even point of units being sold annually for 5
years time.
Secondly, the amount of products they produce must be within capacity. The better situation
would be; they use less than 100% percent capacity to produce. Because 100% capacity
production is very risky if products are not sold well or left in the inventory.
Thirdly, the requirement is that they can earn profit through selling the products they make, or
at least they can generate all money they put in the plan back. Therefore, in order to achieve
high gross profit percentage, Sharma and Gupta might have to use “All Costs Plus Price”
method of pricing. This method of pricing adds up the direct material cost, direct labor cost,
and overheads costs of the product, and adds to it a desired profit percentage. This will ensure
that the market doesn’t influence the profit they make, but Sharma and Gupta do. The downside
of this method would be customer does not want to pay for the cost of the product.
Last but not least, it has to be safe and conservative enough to keep the business continue
running in case of some uncertainties in the future.
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6. Recommendations
If the company use production of 77.4% capacity, Sharma and Gupta can recover all
the expense and also the working capital. So, this will help them meet minimum requirements
of the decisions. If they can maintain the level along the project lives, they can consider
producing more products to generate more profit. Importantly, there is no point of using too
much production capacity, because the company have to pay a lot of storing expense in case
unable to sell the inventories. It is not of need to take additional risk, if Sharma and Gupta are
conservative, on the other hand if they are not afraid, they can increase more production for the
better profit for the company.
7. Conclusion
Based on the CVP analysis on break-even, Sharma and Gupta can proceed with the fly
ash brick project if they can ensure that they can reach the sales of 2.4 million. They can
proceed on with the project if they are able to follow the points in the discussion made above.
If they can ensure the sales of 2.4 million, and continue with the project, it can more profitable
in future and can provide more jobs for the people as well as helps the environment.
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References
Investopedia. (2018). What is a 'Fixed Cost'. Retrieved May 18, 2018. From
https://www.investopedia.com/terms/f/fixedcost.asp
Investopedia. (2018). What is a 'Financial Structure'. Retrieved May 18, 2018. From
https://www.investopedia.com/terms/f/financial-structure.asp
Investopedia. (2018). What is a 'Variable Cost'. Retrieved May 19, 2018. From
https://www.investopedia.com/terms/v/variablecost.asp
DANIEL RICHARDS. (2017). How to Do a Breakeven Analysis. Retrieved May 19, 2018.
From https://www.thebalancesmb.com/how-to-do-a-breakeven-analysis-1200834
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