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. However, it is determined that project would be on breakeven when the company would produce 157,333 bricks in a given month. See figure 1.
On the other hand, thecompany would sell one brick at the cost of 7 rupees. Similarly, it would have atotal capacity of the producing 4 million bricks in a year.However, due to the demand in the market, it is anticipated that company would be able to sell 2.4 million bricks in thefirst year of its operations. Similarly, breakeven point would help to estimate the expenses of the company.
Indeed, it would also reveal the cost associated with production. Meanwhile, project’s feasibility can be judged through the cost of production, and return on the investment. However, it would also provide help to make extra efforts to exceed the breakeven point to make aprofit for the company by reducing the cost of production.
The company would sell one brick for 7 rupees in the market. Whereby, company has the capacity of producing 4 million bricks per annum. However, itis estimated that company would sell around 2.4 million bricks in the market so that it would have around 1.28 million earnings before the tax. Meanwhile to achieve the target of 2 million income before tax then company would need to sell around 2.688 million bricks to achieve targeted income.
There would be high impact on the return on equity when thevolume of sales increases. Meanwhile, the return on equity means that investment that has been made by the partners. However, the debt is not included in the equity. Because, the bank is not apartner in the profit, loss situation. However, because the equity holders are partners in the profit and loss. Hence, the volume of sales would have apositive effect on the return to them.
Also, the bank is not the partner in the profit, because, it only has to collect the interest rate only periodically. Similarly, if the project could sell the 2.4 million bricks at the price of 7 rupees per brick, then its return on the equity would be 21% annually. However, if the company sell the 2.7 bricks in the market atthe same price, then thecompany would have 33% return on equity.
I addition, if the company’ sell volume increases by 2.4 million to 2.7 million around by 300,000 units, then its return on the equity increases by 11%, which is very attractive for the company to focus on increasing the volume of the sales. Similarly, if the company’s sales volume declines by same units, its return on equity would also decline by the same rate of 11%
Similarly, the increasing volume of the sells units would have apositive impact on the return on equity, but the declining sells units would havea negative impact on the return on equity. Because, the company would have to meets first its debt obligations, and then to the equity holders. Hence, thevolume of sale would affect the return on equity…………………
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