FLY ASH BRICK PROJECT: feasibility study using CVP analysis Case Solution
The proposed project by Rajiv Sharma to his friend that defines it as a business plan of the fly ash brick manufacturing company. Rajiv has the years of experience in the construction industry and has good contacts, and he knew about the potential of fly ash bricks in the market due to increasing construction in the market would raise the demand for these bricks.
However, fly ash is the wastage of the power generation sources that generate power through the coal. Meanwhile, the ash is the residue obtained by the combustion of the coal. Thus, it is collected at various stages of the thermal power generation process. Similarly, it is anticipated that production of ash would increase due to use of coal as the prime fuel for many years ahead.
Fly ash is the wastage that could be used to produce the fly ash bricks that is comparatively good against the other bricks produced through burnt clay. However, the ash brick consists of four material to produce fly ash brick; sand; gypsum; lime, and theprocess is to make in the form of apaste, transfer to moulds fitted in the hydraulic press, where it would take one to two days to dry.
The market has potential to adopt the ash bricks because it is anticipated that there would be ashortage of 20 million to 70 million home units to accommodate the increasing population of India. It was a great business opportunity because there is ahuge gap in the construction industry to sell a new product, that is much reliable than conventional bricks. Meanwhile, a single unit of brick in the market would be soldfor 7 rupees per unit.
So, coming back to investment proposal, it is important to know that how much company would need to invest in the fixed assets, what should be their working capital. Meanwhile, if the company has the production capacity of 4 million bricks annually, so, how much should thecompany make thesell to be on breakeven point.Moreover, what would be company’s fixed costs and variable cost?
Similarly, it is critical to know that how much company would have areturn on equity, and that would thecompany be able to meet its debt obligations that it is supposed to take amortgage loan from the bank.Because the company has to ensure that it is earning sufficient to meet with future complications of acquiring new plant and equipment since the plant and equipment have five years life with no salvage value.
Two friends have to prepare a total amount of INR10 million. However, 6 million rupees would be invested by partners from their sources. Meanwhile, the remaining amount of 4 million rupees would be provided by the bank in the form of against the mortgage of equipment at the interest rate of 12% per annum.
Similarly, 8 million of the investment would be invested in the fixed assets, that includes the building modification, water arrangements, machinery, trucks, and other payload machines. See Exhibit 1 which shows theamount of each asset. Similarly, the remaining amount of the investment would fulfill the working capital requirements.
Furthermore, the project would have fixed cost irrespective like depreciation on the plant and equipment, and interest rate which is 12% annually, and salaries expenses, other administration and supplies cost. See Exhibit 2 Which shows the fixed costs in detail, but all fixed cost are calculated on a monthly basis to approach a proper analysis of the project.
Furthermore, the project would incur these costs irrespective of the production of the bricks at the plant. Meanwhile, there would be other variable costs that are relatedto production such as the raw material, electricity, labor cost. See Exhibit 3 Which gives details of the variables cost of INR 900,000 that would incur iftheyproduce 0.2 million bricks in a given month. Which means that variable cost of the producing one ash brick would be INR 4.50.
Breakeven Point & CVP Graph
The project would have fixed cost of 393,333 in a given month. However, the cost of producing a single brick would be INR 7 rupees. Meanwhile, the variable cost per brick would be 4.5 rupees................................