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.