Sharma can reduce the fixed costs on equipment leases

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Sharma can reduce the fixed costs on equipment leases. She may ask lower payment from the equipment company for equipment that they lease since they are in the beginning of the business. Reducing fixed also can be done by renting the trucks or company vehicles. Apart from that, variable cost can decrease by having an efficient work spaces and processes. This resulted to lower labor time and the consequent cost. The effectiveness of money invested in the company or business can be determined through return on equity (ROE). In other words, ROE will measure the company’s performance. A company that increase its ability to generate profit without needing as much capital will have a rising ROE. As per calculated, ROE ratio per year for this scenario is 4.3%. Roughly mean that the company generated Rs 0.043 in profit for every Rs in equity, which is quite low. In this case, Sharma or Gupta will look at ROE of Rs. 129,000 (Rs 0.043 multiple with Rs 3 million per investor). As the life of the project is estimated to be 5 years with negligible salvage value, therefore the ROE per year will accumulates to Rs. 645,000 after five years. This shows that the business model is not worth of Rs. 3 million investments because it does not provide a return within its five years of operation. However, this company can improve its ROE using various options. One of the ways is to use more financial leverage i.e. increase the amount of debt capital relative to its equity capital, thus increase its ROE. As profits are in the numerator of the return on equity ratio, increasing profits relative to equity increases a company's return on equity. Increasing profits does not necessarily have to 14
come from selling more product. It can also come from increasing prices of each product sold, lowering the cost of goods sold, reducing its overhead expenses, or a combination of each. Another way to increase its ROE is to improve its asset turnover by having more sales that relative to its assets. Hence, they should increase their production output to more than 2.4 million bricks since the plant can produce up to 4 billion bricks per year and also increase the selling price per brick. In Scenario 2, it has been mentioned that the plant has the maximum capacity to produce 4 million bricks per year. This result in the total revenue of Rs.28 million and the income operating of Rs.10 million. Using the calculated revenue and break even sales given in Scenario 1 which is Rs.16.072 million, estimated sales can drop until Rs. 11.928 million. In other word, their sales will drop Rs. 11,928,000 before they begin to experience loss. This is a massive amount of loss. Besides, the margin of safety ratio suggests the sales will drop 42.6% where the company will be operating at its break-even point. Therefore, it is not recommended to utilize the maximum production capacity even the ROE for the maximum production capacity is 0.71 which suggesting a high profitability, taking into consideration of the loses that they will gain. In fact, they previously proposed to produce 2.4 million units of bricks rather than using at the maximum capacity.

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