Question

If Nipponply wants to earn 3,000,000 rupees per year, how many units need to be sold?

Thakkar's initial decision was to pursue a business plan that had a trading capacity of 45,000 units per year, but the actual production had to be based on market demand Thakkar estimated that, ultimately. 29,250 units could be sold per year at an average price of +2,200 per unit. Nipponply could produce 29,250 units with 65 per cent capacity utilization (1.e., the lowest level of capacity). For the second and third year. Thakkar estimated that Nipponply would have 38.250 units and 45,000 units with 85 per cent capacity utilization (a moderate level of capacity) and 100 per cent capacity utilization (the highest level of capacity), respectively. The initial investment in the project would cost $29.965 million, of which 21.915 million would be drawn from the firm's own resources, the rest would come from a bank loan at an interest rate of 11 per cent (see Exhibit 7). The life of the project was estimated to be fifteen years. The salvage value of the IT re, plant, and machinery at the end of fifteen years would be negligible and therefore could be ignored. The salvage value of the building machinery at the end of fifteen years would be *250,000 EXHIBIT 3: EXPENSES RELATED TO THE VOLUME OF SALES PER MONTH (FOR 3,750 UNITS) Particulars Manufacturing cost Advertising expense Promotional expense Electricity expense Total expenses Amount (3) 6,682,500 165,000 82.500 82,500 7,012,500 Source: Created by the case author based on company documents. EXHIBIT 4: ESTIMATED INVESTMENT Particulars Information technology infrastructure Amount (7) 1,575,000 1,250,000 26,100,000 200,000 29,125,000 Building Other miscellaneous assets (i.e., inventory) Total investment Source: Created by the case author based on company documents EXHIBIT 5: ROUTINE EXPENSES PER MONTH Particulars Administrative costs Office supplies Electricity Miscellaneous Total monthly expenses Amount (5) 20,000 5,000 40,000 5,000 70,000 Source: Created by the case author based on company documents EXHIBIT 6: PERSONNEL COSTS PER MONTH Employee Designation Regional sales managers Business development managers Sales executives Office assistants Total monthly personnel costs Number of Employees Amount (E) 3 1,080,000 720,000 6 864,000 3 288,000 2,952,000 Source: Created by the case author based on company documents. EXHIBIT 7: CAPITAL STRUCTURE Source Equity Debt (bank loan) Total capital Amount (7) 21,915,000 8,050,000 29,965,000

Answer 1

We have been asked to find out the volume of sales to earn $3M profit.

Number of unit to be sold = (Fixed cost per annum + Target Profit ) / Contribution per unit

19,983.65 = (5,353,167+3,000,000)

Total 19984 Units will be required to be sold per annum to have profitability of $3M.

Calculation of Contribution per unit :

Sales Price Per unit	2,200.00
Manufacturing cost per unit	1,782.00
Contribution per unit	418.00

Working note for Manufacturing cost per unit :

Particulars	Total Cost	Number of Units	Manufacturing cost per unit
Total Manufacturing Cost	6,682,500.00	3,750.00	1,782.00

It is assumed that Advertising, Promotional & electricity expense are fixed cost and wont change with the volume.

Now let us work out Fixed cost per year :

Various Fixed Cost per year	1,170,000	See working notes
Personnel cost per year	2,952,000
Depreciation per year	345,667
Interest cost per year	885,500
Total Fixed Cost per year	5,353,167

Working notes for Various Fixed cost per year :

Advertising Expense	165,000.00
Promotional Expense	82,500.00
Electricity Expense	82,500.00
Administrative Cost	240,000.00	(20,000*12)
Office Supplies	60,000.00	(5,000*12)
Electricity	480,000.00	(40,000*12)
Miscellaneous	60,000.00	(5,000*12)
Total Various fixed cost per year	1,170,000.00

Working notes for calculation of Depreciation cost per year :

Particulars	Original Cost	Salvage Value	Balance Value	Life	Depreciation per year
Information Technology Infrastructure	1,575,000.00	-	1,575,000.00	15.00	105,000.00
Plant & machinery	1,250,000.00	-	1,250,000.00	15.00	83,333.33
Building	2,610,000.00	250,000.00	2,360,000.00	15.00	157,333.33
Total Depreciation					345,666.67

There wont be any depreciation of misc asset which is in nature of inventories because such asset's value do not get reduced over a period of time.

Working note for Interest Cost :

Total Borrowing	8,050,000.00
Interest @ 11%	885,500.00