# Is kept to 24 million bricks only the return on

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is kept to 2.4 million bricks only). The return on equity means that investment that has been made by the partners (does not include the loan from the bank) debt is not included in the equity. Below is the calculation of Return of Equity (ROE) ;-
14 ROE = Net Income (Annually) X 100% Investment = (2.4 Million X 2.5) - Fixed Cost (3,220,000 +2,520,000) X 100% 6 Million = 6,000,000 - 5,740,000 X 100% 10 Million = 260,000 X 100% 10 Million = 0.0433 X 100% = 4.33 % Contribution Margin Contribution margin model also called gross margin is an advantage for planning and decision making can be understood and illustrated by applying the model to a product. By subtracting fixed expenses from the contribution margin, it will yield the operatin g income. The contribution margin can be used to measure a company’s profitability as well as measure how profitable of a particular product line. It can help determine if it is reasonable for the company selling it at its selling price. If the contribution margin is extraordinarily low, it means the product line is unlikely to generate enough profit to make it worth keeping. Therefore, the higher contribution margin will generate greater incomes. The calculation of contribution margin model for this case is shown as below.
15 Per Unit X Volume = Total % Revenue 7.0 Variable Expenses 4.5 Contribution margin 2.5 X 2,400,000 = 6,000,000 36% Fixed expenses 5,740,000 Operating income 260,000 Exhibit 11: Contribution margin model As mentioned in the article, the revenue of the fly ash brick is Rs 7.0/brick. Based on the variable expenses as mentioned above, the variable price is Rs 4.5/brick. After the revenue subtracted the variable expenses, and divided by the revenue, the contribution margin of fly ash bricks is 36%. It showed that the contribution margin is considered low which variable expenses occupied the majority of total revenue. Fortunately, the targeted sale (2.4 million bricks annually) is able to generate income to cove r the fixed expenses, but there is high risk if the bricks couldn’t sell as expected. Operating Leverage Operating leverage describes the percentage of operating income for given change in revenue. Greater operating leverage indicates higher fixed cost compared to its variable cost and also greater risk if there is a fluctuation in sales for a certain project or investment. We benchmarked 2,400,000 bricks/year tally with the estimation of the partners which they are able to sell. The result is shown in the table below. A movement of sales of 10% will have an impact towards operating income at 231%. The change of
16 sales is substantially affecting the operating income; hence, Fly Ash project is considered as a really high operating leverage. A few assumptions have to be made in order to estimate the Operating Leverage which are as follows: i. The fixed cost is constant despite the production amount. ii. The sales price, raw material cost and other variable cost remain constant throughout the entire project period.
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