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BILL FRENCH CASE

Submitted By: Pratichi


Sharan Section B

Question 1: What are the assumptions implicit in Bill French’s


determination of his company’s break-even point?

The following assumptions are implicit in Bill French’s determination:

• He has assumed that there is just one breakeven point for the firm (by
taking the average of the 3 products)

• He has also assumed that the sales mix will remain constant

• He has also assumed that the sales mix will remain constant. Total
revenue and total expenses behave in a linear manner over the relevant
range

• Since the capacity is being expanded to increase production of Product C,


it could be assumed that this increase should be allocated to this product.
Production of Product A is to be scaled down, but its level of fixed costs
has been assumed to be unchanged

Question 2: On the basis of French’s revised information, what does


next year look like?

a. What is the break-even point?

Calculation of the break even points using the new estimates:

Breakeven points have been calculated using the formulae:

Breakeven number of units = Fixed costs / Contribution margin per


unit

Where

Contribution margin per unit = Selling price – Variable cost per unit

Aggreg
ate "A" "B" "C"
Sales at full capacity
(units) 2000000
Sales Volume (units) 1750000 400000 400000 950000
Unit Sales Price $6.948 $10 $9 $4.8
$121600 $40000 $36000 $45600
Sales Revenue 00 00 00 00
Variable Cost per unit $3.385 $7.5 $3.75 $1.5
Contribution margin per
unit $3.56 $2.5 $5.25 $3.3

$592500 $30000 $15000 $14250


Total Variable Costs 0 00 00 00
$369000 $96000 $15600 $11700
Fixed Costs 0 0 00 00

$254500 $54000 $19650


Profit 0 $40000 0 00
Ratios:
0.48719 0.4166
Variable cost to sales 06 0.75 67 0.3125
0.51280 0.5833
Unit contribution to sales 94 0.25 33 0.6875
Utilization of capacity 87.50% 20% 20% 47.50%
Break Even Point (units) 1035686 384000 297143 354545

The break even unit for the aggregate production is 1035686 units.

b. What level of operations must be achieved to pay the extra


dividend, ignoring union demands?

Answer.

To pay the extra dividend of 50% and to retain the profit of $150000 we need to
have the profit after taxes as $600000. As half of the revenues go to the
government as taxes therefore the total revenues before tax deduction should
be equal to $1200000.

Operating income after taxes


($450000 dividend + $150000
profits) $ 600000
Selling price $6.95
Variable cost per unit $3.39
Contribution margin per unit $3.56
Operating income before tax
(assuming 50% of the revenue goes
as tax to the government) $ 1200000
Total Fixed Cost $3690000
No of units required to be produced
= (FC + Operating
income)/Contribution 1373595
c. What level of operations must be achieved to meet union
demands, ignoring bonus dividends?

Answer.

Operating income after taxes


($450000 dividend + $150000
profits) $450000
Selling Price $6.95
Variable cost per unit $3.73
Contribution margin per unit $3.2
Operating income before tax
(assuming 50% of the revenue goes
as tax to the government) $900000
Total Fixed Cost $3690000
No of units required to be produced
= (FC + Operating
income)/Contribution 1434375

d. What level of operations must be achieved to meet both union


demands & bonus dividends?

Answer.

Operating income after taxes


($450000 dividend + $150000
profits) $600000
Contribution margin per unit $3.2
Operating income before tax
(assuming 50% of the revenue goes
as tax to the government) $1200000
Total Fixed Cost $3690000
No of units required to be produced
= (FC + Operating
income)/Contribution 1528125

Question 3: Can the break-even analysis help the company decide


whether to alter the existing product emphasis? What can the company
afford to invest for additional “C” capacity?
Answer:

Break even analysis can be used to decide whether to alter the existing product
emphasis or not. For example in this case, if we refer last year’s data, we can
see that the product C is not economically feasible to manufacture at $2.40 /
unit. Following table gives the analysis for checking whether the company can
afford to invest in additional “C” capacity.

Total number of units


produced 950000
Sale price $4.8
$45600
Sale revenues 00
Variable cost $1.50
$14250
Total variable cost 00
$31350
Contribution 00
$11700
Fixed cost 00
Investment the
company can $19650
afford 00

Question 4: Calculate each of the three products’ break even points


using the data. Why is the sum of these three volumes not equal to the
1,100,000 unit’s aggregate break-even volume?

Answer:

Aggreg
ate “A” “B” “C”
Sales at full capacity
(units) 2000000
Actual Sales Volume
(units) 1500000 600000 400000 500000
Unit Sales Price $7.2 $10 $9 $2.4

$108000 $60000 $36000 $12000


Sales Revenue 00 00 00 00
Variable Cost per unit $4.5 $7.5 $3.75 $1.5
Contribution margin per
unit $2.7 $2.5 $5.25 $0.9

$675000 $45000 $15000 $75000


Total Variable Costs 0 00 00 0
$297000 $96000 $15600 $45000
Fixed Costs 0 0 00 0
$108000 $54000 $54000
Profit 0 0 0 0
Ratios:
0.4166
Variable cost to sales 0.625 0.75 67 0.625
Unit contribution to 0.5833
sales 0.375 0.25 33 0.375
Utilization of capacity 75.00% 30% 58% 37.50%
Break Even Point (units) 1100000 384000 297143 500000

Question 5: Is this type of analysis of any value? For what can it be


used?

The following are the benefits of the break even analysis:

The break even analysis helps understand and formulate the relationship
between costs (fixed and variable), output and profit. The technique can be used
to set sales targets and/or prices to generate target profits. In a wide product
range, the analysis helps to find out which products are performing well and
which are leading to losses .It is also versatile enough to include items like
donations, wage increases, etc. that directly or indirectly affect costs