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Bill FRENCH

Case: Importance of activity based Amarendra Sahu, 0911219 costing

Brijendra Arya, 0911226 Gurav Shekhar, 0911238 Kalpesh Muchchal, 0911253 Narendra Singh, 0911255

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Case Facts
Firm sells 3 products A, B, C with demand of A expected to

fall, that of B to remain stable and that of C to double

Fixed costs in the plant change with capacity utilisation Half of the profit after taxes are shared with the government Selling price of C to be increased to reflect quality and

maintain reputation

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Existing condition
Plant capacity 2,000,000 per year Total fixed costs - $2,970,000 Total revenue - $10,800,000 Sales volume 1,500,000 units Capacity utilization 75% Average unit price - $7.20 Average unit variable cost : $4.50 Average unit Contribution Margin to sales 0.375 Break-even sales point - $7,920,000
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Assumption
The sale volume ratio in units of A, B, C remains same

as 6:4:5

No change in fixed cost Weighted Average contribution margin remains same

( $2.70)
The selling price does not change if we are talking

Break even in sales (revenue) terms

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New Information
Capacity of the plan to be increased by investment of

%60000 per month ( $720000)

Sale price to C is to be increased by 100% Sales volume of C is to be increase by 450000 units Sales volume of A is reduced to 2/3 to 400000

*Note: All Break-even points are calculated in units. The sales unit proportion to be used to find out individual product line units. Dollar value can be obtained by multiplying Break-even unit with weighted average selling price.
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Change in Product Structure

Additional Investment in C = 60000*12 = 720000, New C price is doubled A's new volume is 2/3 and C's volume is increased by 450000 A B C Total New Sale Volume 400000 400000 950000 1750000 Sale Price Sales Revenus Variable Cost Variable Cost to sales Unit contribution to sales Utilization of capacity 10.00 4000000 7.50 0.75 0.25 20.00% 4.806.948571 1216000 3600000 4560000 0 3.75 0.42 1.53.385714 0.31250.487253 9.00

0.58 0.68750.512747 4/28/12 20.00% 47.50% 87.50%

Change in Profit Structure

Profit After Tax Including Govt. Share Tax Rate Profit Required Contribution Margin Fixed Cost 600000 1200000 16.67% 1400000 3.56 3690000 $9926929

Number of Units required 1428629 New Union Demand = 10% increase in Variable cost New Contribution Margin Number of Units for same dividend Number of Units for new dividend 3.22

1479397 $10279699 1578644 $10969322

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Investment in Cs Capacity
Break Even analysis is useful for company in deciding the

product emphasis
C's Price Contribution Margin Total Units Fixed cost can be covered Current Fixed cost Maximum Investment Profit Loss from A Max Inv If A's loss taken Old (2.4) 0.9 950000 855000 450000 405000 500000 Not Possible
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New (4.8) 3.3 950000 3135000 450000 2685000 500000 2185000

Individual Break-even Analysis

Sale Volume Sale Price Sales Revenus Variable Cost Variable Cost to sales Unit contribution to sales Utilization of capacity Total Variable Cost Fixed Cost Profit BEP (Units)
A 600000 10.00 6000000 7.50 0.75 B 400000 9.00 C Total 500000 1500000 2.40 7.2

3600000 120000010800000 3.75 1.5 4.5 0.42 0.625 0.625 0.375 25.00% 750000 450000 0 500000 0.375 75.00% 6750000 2970000 1080000 1100000

0.25 0.58 30.00% 20.00% 4500000 1500000 960000 1560000 540000 540000 384000 297142.86

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Value of Break-even Analysis

Helps understand and formulate the relationship between costs (fixed

and variable), output and profit

Helps quickly observe profit levels at different outputs In a wide product range, the analysis helps to find out which products

are performing well and which are leading to losses

The technique can be used to set sales targets and/or prices to generate

target profits
It is also versatile enough to include items like donations, wage

increases, etc. that directly or indirectly affect costs

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