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03-09-2018

Product code: Accounts-AW636

 

In April 2013, Radi AlShamsi had a business plan. For quite some time, he had been doing some research exploring the potential of his 'dream project" - establishing a fly 
ash brick manufacturing unit in India - and had seen huge potential for profit in the project His  long - time friend Ali Jabr was also interested but had a few doubts regarding the feasibility of  the project Radi. on the other hand, was sure of his plan Years of work in the construction  industry had shown him the potential of using large volume of fly ash bricks in construction,  especially in housing and in infrastructure projects .

On the basis of preliminary analysis, he decided to set up a plant that would have the capacity to  manufacturing four million bricks per year Though actual production would depend on market  demand, the partners estimated that 2.4 million bricks could be sold per year at an average  price of 7000 Dh per 1000 bricks. He wanted to ascertain the feasibility of the project using a  cost-volume-profit (CVP) analysis 

Background: 
Fly Ash was a residual obtained after combustion of coal. A huge quantity of coal is utilized to  produce thermal power, the major power generation source When crushed coal is burned to  generate heat, the residual product contained SOS fly ash. The fly ash from the exits flue gas  was collected at various stages of the flue gas path and at the dust collector fitted before the  final chimney. Market trends revealed that coal would be continue to be used as the prime fuel  for many more years, resulting in a great amount of fly ash generation. 
 

Fly ash as a construction material was considered appropriate on two accounts. First, there were  environmental concerns about the traditional way of making bricks from clay that comprise  topsoil. Removing this top layer makes the land infertile for a long period. Using fly ash for  making bricks instead of clay would thus help preserve the fertility of the soil.

Second, it was  estimated that there would be a substantial shortfall in the availability of different types of  building materials, including bricks. The government was keen on promoting fly ash bricks in the  construction sector. This would enable a waste product to be used in as a construction material  and also conserve the environment and resources. 
 


Manufacturing process: 
Government authorities had developed technology to replace burnt clay bricks with fly ash as a  construction material for building walls. The manufacturing process for those bricks, known as  fly ash-lime-gypsum, required intimate mixing of fly ash, sand, added to make a fine blend. The  ratio of the input material was as follow:  ?Fly ash: 60 to 80 percent ?Sand 10 percent ?Gypsum: 10 percent ?Lime: 10 to 20 percent 1 
 

Water was added to the mix to form a paste after whkh the mixture was transferred to mould 
fitted in a hydraulic/mechanical process. The bricks were later dried in the open for one or two  days and then cured using water. A process outline for manufacturing fty ash bricks is given in 
 

exhibit 1: 
Brick Making Machine (there is supposed to be a diagram ) 
tpress) 

Transportation 

Dry Curing 

Wet Curing 
Drying 
Inspection 

Sorting 

Dispatch 
 

Exhibit 1
Market potential: 
The annual demand for clay bricks for construction purpose was estimated to be 180 billion 
tones that required almost 340 billion tones of clay annually. Production of clay bricks required  clay that resulted in leeching the fertility of the land in the long run. With construction  progressing at very fast pace, the government was keen to develop a regular supply of bricks  without causing damage to the soil. 
 

The use of fly ash in such circumstances was a priority. The quality and durability of fly ash bricks  were considered very suitable for application in various construction projects. A large quantity  Of fly ash was available as waste material from thermal power plants. The government was 
waging manufacturing of fly ash bricks, and various concessions were given to such  manufacturing. Further, these bricks were factory-made by mixing the ingredients with water  without consuming thermal energy. 
Manufacturers of construction materials had also begun to note the importance and application  of fly ash bricks. They knew that with an increase in construction activities, there will be an  equally rising demand for bricks. The housing sector was predicted to experience a shortage of  20 million to 70 million home units, which presented a ripe market for the use of cheap fly ash  as a raw material in construction 
 

On the basis of such preliminary analysis, Radi AlShamsi decided to set up a plant that would  have the capacity to manufacturing four million bricks. He presented the calculations for 

Investment required: 
Radi AlShamsi said we require 8 million Dh as initial investment in fixed assets. Here, take a look  at the costing According to my estimate, the major expenses would be in transport vehicles and  machinery. The building modifications will require approximately 1.40 million Dh. The water  supply arrangements will be another minor expense (see exhibit 3 for estimated expenses) 
Estimated investment costs (in Dh) 
Building modifications 1,400,000 ; 
Water supply arrangements 100,000 
Machinery 2,000,000 
Trucks 3,000,000 
Ray toad machine 1,500,000 
Total 8.000,000 
 

Exhibit 2
in addition to the above investments costs. I have estimated the working capital requirements,  which are expected to be approximately 2 million Dh. Other routine expenses are estimated as  Routine expenses per month.

By the way there would be other expenses related to the volume of production these are essentially the raw materials energy and labor would be 900000 dh which will be  related to volume of production (for 0.20 million bricks) 

Fly ash. 250000 
Gypsum. 250000 
Lime. 300000 
Sand 300000 
Electricity 40000 
Labor. 50000 
Total 900000 
 

Exhibit 3
Hadi AiShamsi also estimated the manpower costs as in exhibit 5 In addition, Radi AiShamsi 
himself would work as a pmduition manager, since hiring another person for the post would 
Cost them Dh 50,000  Ali Jabari (the other partner) was puzzled and wanted to ascertain more dearly the feasibility of  the project f hey agreed to consult expert to evaluate their business plan 

Personnel costs per month 
1 Workers Dh 100.000 
| Office assistant 20,000 
! Watchman 15.000 
25,000 
foul 160,000 
Exhibit 4
final Decision: 
A detailed discussion followed the conversation. Although the proposed plant had the capacity  to produce four million bricks per year, actual production would depend on market demand.  Further, output would decline in case of any breakdowns of plant and equipment. Finally, the  partners estimated that a sales volume of 2.4 million bricks could be sold per year at an average  price of Dh 7.000 per 1000 bricks (1000 bricks is the unit of production).

The initial investment  would cost Dh 10 million, out of which Dh 6 million would be invested by partners from their  own resources. A local bank had agreed to provide a loan for the balance (Dh 4 million) at an  interest rate of 12% per year. Radi AiShamsi would work full time in the business and WQuW  draw a salary of Dh 50,000 per month. The life of the project was estimated to be five years. The  salvage value of the plant and equipment at the end of the project life would be nothing (no  scrap value). However, investment in the working capital would be recovered in full. 

Questions

t Analyze various expenses into annual fixed cost, variable cost, and initial investment 
2 Find the breakeven point 
many bricks need to be sold so as to earn a targeted income of Dh 2 million per year 
4 What advice can be given to the owners? 

Download Questions

The analysis clearly shows that even if the plant will run at full capacity, it is not possible to reach the target 2 million dh profit as it requires around 5 million ricks to get sold.

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