Bill French

Topics: Variable cost, Costs, Fixed cost Pages: 7 (2580 words) Published: November 23, 2010

Bill French picked up the phone and called his boss, Wes Davidson, controller of DuoProducts Corporation. “Wes, I’m all set for the meeting this afternoon. I’ve put together a set of break-even statements that should really make people sit up and take notice – and I think they’ll be able to understand them, too.” After a brief conversation, French concluded the call and turned to his charts for one last checkout before the meeting. French had been hired six months earlier as a staff accountant. He was directly responsible to Davidson and had been doing routine types of analytical work. French was a business school graduate and was considered by his associates to be quite capable and unusually conscientious. It was this later characteristic that had apparently caused him to “rub some of the working folks the wrong way,” as one of his coworkers put it. French was well aware of his capabilities and took advantage of every opportunity that arose to try to educate those around him. Davidson’s invitation for French to attend an informal manager’s meeting had come as a surprise to others in the accounting group. However, when French requested permission to make a presentation of some break-even data, Davidson acquiesced. Duo-Products had not been making use of this type of analysis in its planning procedures. Basically, what French had done was to determine the level at which the company must operate in order to break even. As he put it, 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 costs 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. The accounting records had provided the following information that French used in constructing his chart: Plant capacity – 2 million units per year Past year’s level of operations – 1.5 million units Average unit selling price - $7.20 Total fixed costs - $2,970,000 Average unit variable cost - $4.50 From this information French observed that each unit contributed $2.70 to fixed costs after covering its variable costs. Given total fixed costs of $2,970,000, he calculated that 1,100,000 units must be sold in order to break even. He verified this conclusion by calculating the dollar sales volume that was required to break even. Since the variable costs per unit were 62.5 percent of the selling price, French reasoned that 37.5 percent of every sales dollar was left available to cover fixed costs. Thus, fixed costs of $2,970,000 required sales of $7,920,000 in order to break even. When he constructed a break-even chart, his conclusions were further verified. The chart also made it clear that the firm was operating at a fair margin above breakeven, and that the pretax profits accruing (at the rate of 37.5 percent of every sales dollar over break even) increased rapidly as volume increased (see Exhibit 1 at p. 2). Shortly after lunch, French and Davidson left for the meeting. Several representatives of the manufacturing departments were present, as well as the general sales manager, two assistant sales managers, the purchasing officer, and two people from the product engineering (bill french: p. 1/5)


office. Davidson introduced French to the few people whom he had not already met, and then the meeting got under way. French’s presentation was the last item on the agenda. In due time the controller introduced French, explaining his interest in cost control and analysis. French had prepared copies of his chart and supporting calculations for everyone at the meeting. He described carefully what he had done and explained how the

chart pointed to a profitable year, dependent on meeting the sales volume that had been maintained in the past. It soon became apparent...
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