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In order to identify how many units need to be sold to attain a specific profit, The company would implement a target profit analysis. Which is easily determined by using basic profit equation.Desired profit+Annual¿cost+Annual Interest cost(¿¿Price perunit−VariableCost)= Quantity of bricks to be sold per year(2,000,000+3660000+480,0007−4.50)=2,407843Bricks per yearThe bricks need to be sold so as to earn a targeted income of Rs 2 million per year equal to ¿2,407843Bricks
Question 4: How do volumes affect return on equity? The change in the volume of production would have an impact on the profit of the company so let’s assume that the fixed cost stays the same through the project period. Therefore the profit can either controlled by increase in sales price or increase in production.If the company starts with 150,000 bricks and production cost increases by 15% this will also increase profits by 15 %. Similarly if the company reduces by 15% this will also reduce profits;Increasing / Decreasing Volume EffectUnit Price 7 No. of Units 150,000 172,500 198,375 Revenue 1,050,000 1,207,500 1,388,625 Unit Cost 4.5 Product Cost 667,500 767,625 882,769 Revenue - Product Cost 305,000 305,000 305,000 Fixed Cost 305,000 Proft 77,500 134,875 200,856 Question 5: What advice can be given to the owners.In order for the owners to increase productivity I will suggest developing a new product line also increase the price of the product. After the CVP analysis, I think that would be the best option for them to break-even. In addition, some of the partners suggested that the demand for bricks is going rise and they have the capacity to produce more which would be good for them in the long run.For the company to be more profitable I will suggest they find a new factory that is closer to raw materials, the will help reduce transportation cost.
In terms of the variable cost, the company can find a cheaper material without sacrificing the quality of their product.