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
Sales Revenue $12160000 $4000000 $3600000 $4560000 Variable Cost per unit $3.385 $7.5 $3.75 $1.5 Contribution margin per
unit $3.56 $2.5 $5.25 $3.3
Total Variable Costs
$592500 0 $30000 00 $15000 00 $14250 00 Fixed Costs $3690000 $960000 $1560000 $1170000 Profit $2545000 $40000 $540000 $1965000 Ratios:
Variable cost to sales
0.48719
06 0.75
0.4166
67 0.3125 Unit contribution to sales 0.5128094 0.25 0.583333 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
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
Sale revenues $4560000
Variable cost $1.50
Total variable cost
$14250 00 Contribution $3135000 Fixed cost $1170000 Investment the company can afford $1965000
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
Sales Revenue $10800000 $6000000 $3600000 $1200000 Variable Cost per unit $4.5 $7.5 $3.75 $1.5 Contribution margin per
unit $2.7 $2.5 $5.25 $0.9
Total Variable Costs $6750000 $4500000 $1500000 $750000 Fixed Costs $2970000 $960000 $1560000 $450000
Profit $1080000 $540000 $540000 0 Ratios:
Variable cost to sales 0.625 0.75
0.4166
67 0.625 Unit contribution to
sales 0.375 0.25 0.583333 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
