You are on page 1of 10

Bill French: Case 16-3

1

Bill French Case 16-3

Introduction

French, a staff accountant who was hired six months was well aware of his capabilities and took advantage of every opportunity that arose to try to educate those around him. Then, he was requested permission to make a presentation of some break-even data.

The Duo-Products Corporation had not been making use of this type of analysis in its planning or review procedures. What French had done was to determine the level at which the company must operate in order to break even.

He uses information given in past accounting records to construct his break even analysis without take into consideration with other department about the company operation.

As per Bill French: “The company must be able at least to sell a sufficient volume of goods so that it will cover all the variable costs of producing and selling the goods. Further, it will not make a profit unless it covers the fixed cost as well. The level of operation at which total costs are just covered is the break-even volume. This should be the lower limit in all our planning.”

5 $2.000 $960.9) $6.5) $1.000 $450.000.100. There will be no significant changes in the business.625 0.000 / $2.000 1 500 000 $7.75) C 500 000 $2.000 $540.2 .000 / $0.750.7) 2.000.080.000 ($450.5 $2.4 $1.500.4 .000 0.29 30% 384.5) $4.200. Sales volume will be maintain.5) Aggregate 2.970.9 ($2.Bill French: Case 16-3 2 Question 1 What are the assumptions implicit in Bill French’s determination of his company’s breakeven point? 1.000 / $5.5 ($10-$7.000 $3.625 0. Refer to the table below. 3. A Sales at full capacity (units) Sales Volume (units) Unit Sales Price Sales revenue Variable cost per unit Contribution margin per unit (Selling price – variable cost per unit) Total variable cost Fixed cost Profit Ratio : Variable cost to sales Unit contribution to sales Utilization of capacity Break even points (unit) (Fixed costs / Contribution margin per unit) 600 000 $10 $6.2 $10.000 $540.600.500.000 $1.7 ($7.000 0. .416667 0.000 ($960.75 37. There was only one break-even point for the firm whether product by product or in total (he taking average of 3 products). constant dividend for stockholders and labor union will not affect cost.5 $0.58333 58% 297.75 0.5) B 400 000 $9 $3.25 ($9 – $3.000 $1.75 $5.560.000 $0 0. 5. The increase in capacity will be allocated to Product “C” and Product “A” will be decreased.25) $750.375 75% 1.000 0.970.50% 500. 4.000 $1.000 $4.000 $7.000 / $2. However the total fixed cost assumes to be unchanged.560. Total revenue and total expenses behave in a linear manner over the relevant range.000 ($2.000 $2. The sales mix will remain constant.143 ($1.800.$1.$4.

what does next year look like: a.000. and capital has received the risk-adjusted.42 0.25 ($9 – $3.160.3125 0.Bill French: Case 16-3 3 Question 2 On the basis of French’s revised information.000 / $0.925.600. and one has "broken even".000.690.80 $4.6875 354.80) = Fixed cost is about increased about $60.25 384.000 $7.5 ($10-$7. It is shown graphically. although opportunity costs have been "paid".000 „**** = Product A will decrease 200.56) .425.560.143 ($1.000 $3.49 1.25) $1.5 $2. expected return.75) C *950 000 **$4.30 ($4.$1. ****400 000 $10 $4. In the linear case the break-even point is equal to the fixed costs divided by the contribution margin per unit.000 $3.560. A profit or a loss has not been made.170.000 = $1. What is the break.75 0. = Unit Sales price was increased 100% ($2.000 / $3.036.event point? The break-even point (BEP) is the point at which cost or expenses and revenue are equal which there is no net loss or gain.560.56 0.000 ($960.95 $3.545.170.000 = $720.5 $3.000 $960.000 units.95 $12.000 $3.000 0.58 297.75 $5.170.40 x 2 = $4.000 / $2. at the point where the total revenue and total cost curves meet.000 $1.000 x 12) + $450.000 3.500.000 $5.965.000 0.56 ($6.517 ($3.000 / $5.5) $1.690.545 ($1.000 $1.000 per month = ($60.000 0.39 $3.000 + $450.9) $2.000 units of sales.000 ***$1.000 $540. A Sales at full capacity (units) Sales Volume (units) Unit Sales Price Sales revenue Variable cost per unit Contribution margin per unit (Selling price – variable cost per unit) Total variable cost Fixed cost Profit Ratio : Variable cost to sales Unit contribution to sales Break even points (unit) (Fixed costs / Contribution margin per unit) Note: „* „** „*** = Sales volume (unit) in Product C increased up to 450.000 $40.5) Aggregate 2 000 000 1 750 000 $6.000 $1.5) B 400 000 $9 $3.39) $3.8 .

000 $3.000 of company profit + $600.200.000 + 1.596 units Note: $600.690. What level of operations must be achieved to pay the extra dividend. . It will illustrated by this equation: BREAK-EVEN POINT = TOTAL FIXED COST + TOTAL VARIABLE COST b.Bill French: Case 16-3 4 If a business is unable to reach this level of output it will suffer a loss from this product.373. Any output in excess of break even generates profit for the company.000 on government tax.56 = 1. ignoring union demands? FIXED COST +TARGET PROFIT Formula: CONTRIBUTION MARGIN Level operation to be achieved = $3.

Margin Contribution = Sales price – New Variables cost = $6.000 + 1.465 units Note: 1.22 = 1.Bill French: Case 16-3 5 c.425. What level of operations must be achieved to meet the union demands. 2.200. $600.690.39 x 1.633 units .10) = $3.000 of company profit + $450. What level of operations must be achieved to meet both dividends and expected union requirements? FIXED COST + TARGET PROFIT Formula: CONTRIBUTION MARGIN Level operation to be achieved = $3.000 on government tax.95 – ($3.690.000 + 900.518.000 $3. ignoring bonus dividends? FIXED COST + TARGET PROFIT Formula: CONTRIBUTION MARGIN Level operation to be achieved = $3.000 $3.22 d.22 = 1.

Breakeven analysis would suggest that a substantial percentage of Product A's profits go to pay for variable costs instead of fixed costs.185.Bill French: Case 16-3 6 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? Product C Price Selling Price Contribution Margin Total Units Fixed Cost Can Be Covered Current Fixed Cost Maximum Investment Profit / Loss From Product A Max Investment if A‟s loss taken Old $2.185.000 The break-even analysis can help the company decide whether to alter the existing product emphasis because it will allow the company to identify which product generates the highest profit for the company.40 0.000 $2. . Both Products B and C have better ratios in this regard.000 $855.000 $3.90 950. with C's being the highest.000 profit when they decide to invest in Product C.000 $500.000 $500. If the planned increase in C's production goes ahead it will take up almost 50% of the company's production capacity.000 Not Possible New $4.30 950.135.80 3.000 $405.685.000 $450.000 $450. We can see from the table above that the company will gain $2.000 $2.

000 / $0.000 ($960. fixed cost and sales volume.25) C 500 000 $2.5) $6.080.100.100.143 unit.560.000 unit aggregate break-even value but 1.000 / $5.000 $0 0.$1.5) $750.9 ($2.000 $1.5 (Selling price – variable cost per unit) ($10-$7.000 / $2.000 ($450.000 $3.58333 58% 297. we can see that the sums of these three volumes are not equal to the 1.$4.100.5 $0.750.181.7) Sales revenue $6.416667 0.2 $10. This is because each of products has different contribution margin ratio.29 30% 384. Why is the sum of these three volumes not equal to the 1.75 0.000 0.560.75) $1.375 75% 1.970.000 ($2.000 $540.5 Contribution margin per unit $2.Bill French: Case 16-3 7 Question 4 Calculate each of the three products’ break-even points using the data in Exhibit 3.000 $960.000 $2.5) Total variable cost Fixed cost Profit Ratio : Variable cost to sales Unit contribution to sales Utilization of capacity Break even points (unit) (Fixed costs / Contribution margin per unit) $4.800.75 37.600.5) Refer to the data above.2 . .000.000 0.5 $2.000 $4.000 0.7 ($7.000 / $2.4 $1.000 Variable cost per unit $7.625 0.000 $1.000 units aggregate break-even volume? A Sales at full capacity (units) Sales Volume (units) Unit Sales Price 600 000 $10 B 400 000 $9 $3.50% 500.143 ($1.500.000 $1.9) Aggregate 2 000 000 1 500 000 $7.200.4 .000 $540.000 $450.75 $5.625 0.25 ($9 – $3.500.970.

2. production. variable cost. To predict the effect on profitability if changes in cost and efficiency. base on the break even chart. commodity prices. To analysis the relationship between fixed cost and variable cost. . Measure profit and loss at different levels of production and sales.000 a month. To show to John Cooper. It can be extended to show how changes in fixed cost. Variable expenses increase when sales increases. Manufacturing looks toward an increase in fixed manufacturing costs of $60. To predict the effect of changes in price of sales.Bill French: Case 16-3 8 Question 5 Is this type of analysis of any value? For what can it be use? Breakeven analysis enables a business organization to: 1. Production Control how unit of sales increase taken up. The main advantage of break even point analysis is that it explains the relationship between cost. they have three product lines. As per Bill. and he‟d also like to see whether there‟s any difference if calculations base on an analysis of individual product lines. volume and returns. Refer to the Duo-Products Corporation. we can see the cost and profit relationship for the new volume. 4. A. revenues will effect profit levels and break even points. Fred. B and C with different level of productions. 3.

These and other factors will complicate the break-even analysis. Breakeven analysis is the relationship between cost volume and profits at various levels of activity. It is also an important part of cost-volume-profit analysis. the company's many customers (with varying demands for service). with emphasis being placed on the breakeven point. predicting a precise amount of sales or profits is nearly impossible due to a company's many products (with varying degrees of profitability). The breakeven point is where the business neither receives a profit nor a loss. Once you know the fixed and variable costs for the product your business produces. this is when total money received from sales is equal to total money spent to produce the items for sale. and the interaction between price. Frankly. Break even analysis is a very important tool to help any firm in deciding on the best operational volume. It is a popular tool used by small business owners to determine how much volume of their product they must sell in order to make a profit. variable cost and selling price as Bill French puts it. It requires three types of costs namely the fixed cost. promotion and the number of units sold. or a good approximation of them. . “the level of operation at which total costs that is. you can use that information to calculate your company's breakeven point.Bill French: Case 16-3 9 Conclusion Breakeven point is a key financial analysis tool used by business owners. variable plus non-variable are just covered is the break even volume” and it is the least volume that an organization should operate in order to remain in business.

(Harvard Business School. 4. Press. David. et al. 3.com/Break_even_analysis. 1987). 5.htm http://www. .com/Break_even_analysis.htm#WljKgF4s7uRSV5rO. pp.accounting4management.99 (Dayananda. Cambridge University http://www. http://mathslover. 312. 6.hubpages. Against intellectual monopoly.com/hub/Breakeven-analysis 2. 2002). 7. ISBN 978-0-521-87928-6.Bill French: Case 16-3 10 References 1. Michele Boldrin (2008-09-07).accounting4management. Levine.