# The fixed cost will remain the same throughout the

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The fixed cost will remain the same throughout the project duration if we are ignoring the inflation rate. 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. For the basis of the analysis, we consider the following three scenarios (Table 13) to determine the impact of volumes towards Return of Equity (ROE).
Table 13: Scenario consideration Pessimistic Scenario The Company sells break-even volume of bricks annually Target Scenario The Company sells targeted volume at 2,400,000 bricks annually Optimistic Scenario The Company sells 4,000,000 bricks annually (Maximum plant capacity) Table 14 shows the impact on annual production (volume) units to the Annual Net Income, ROE and Return of Investment (ROI) based on the scenarios for Year 1. 10
Case Study 2: Fly Ash Brick Project ACC7101 Based on the table, as the Company sells higher volumes of bricks, the ROE is much higher. Table 14: Net Income, ROE and ROI based on scenarios for Year 1 Pessimistic (Break- even) Target Optimistic (Maximum Capacity) Annual Bricks need to sale 2,296,000 2,400,000 4,000,000 Annual Revenue 16,072,000 16,800,000 28,000,000 Less: Annual Variable Cost 10,332,000 10,800,000 18,000,000 Gross Profit 5,740,000 6,000,000 10,000,000 Less: Annual Fixed Cost 5,740,000 5,740,000 5,740,000 Annual Net Income 0 260,000 4,260,000 ROE (Net Income/ Shareholder's Equity) 0.0% 4.3% 71.0% ROI (Net Income/ Total Investment) 0.0% 2.6% 42.6% 3.8 Target Profit Analysis Target profit analysis is part of Cost-Volume-Profit analysis, with the main objective being to determine the sales level covering fixed costs and variable costs that would allow a certain amount of profit called target profit to be earned during the relevant accounting period (Smirnov, 2019). This analysis estimates the necessary volume taking into consideration total fixed cost, targeted profit, and unit contribution margin based on the defined scenarios consideration in section 1.7. Pessimistic Scenario: Table 15 shows the target profile analysis for a pessimistic scenario (where the Company sells break-even bricks volume annually). Since the Company is selling at break-even, the Company did not make any profit or loss from any of the year. Table 15: Target Profit Analysis for Pessimistic Scenario (Break-even) Annual bricks need to sale Year 1 Year 2 Year 3 Year 4 Year 5 Total 5 Years Fixed Cost 5,260,000 5,424,700 5,596,812 5,776,668 5,964,618 28,022,798 Interest Cost (Loan) 480,000 480,000 480,000 480,000 480,000 2,400,000 Total 5,740,000 5,904,700 6,076,812 6,256,668 6,444,618 30,422,798 11
Case Study 2: Fly Ash Brick Project ACC7101 Annual bricks need to sale 2,296,000 2,570,054 2,913,298 3,355,227 3,944,880 15,079,460 Annual Revenue 16,072,000 17,990,381 20,393,085 23,486,590 27,614,162 105,556,218 Less: Annual Variable Cost (10,332,000 ) (12,085,681 ) (14,316,273 ) (17,229,922 ) (21,169,544 ) (75,133,421) Gross profit 5,740,000 5,904,700 6,076,812 6,256,668 6,444,618 30,422,798 Less: Annual Fixed Cost (5,740,000) (5,904,700) (6,076,812) (6,256,668) (6,444,618) (30,422,798) Annual Net Income (Break Even) 0 0 0 0 0 0 Net Income Margin 0 0 0 0 0 ROE 0.0% 0.0% 0.0% 0.0% 0.0% ROI 0.0% 0.0% 0.0% 0.0% 0.0% Target Scenario: Table 16 shows the target profile analysis for target scenarios (where the Company sells the targeted fixed bricks volume of 2,400,000 annually). Based on the table, the Company only managed to make profit in Year 1 by Rs. 260,000 before recording higher losses for subsequent years.