1. aWhat are the assumptions implicit in Bill French’s determination of his company’s break-even point? * 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. 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. * Constant dividends are paid out to the company’s stockholders. * Labor union will not significantly affect cost structure. No substantial changes in product prices.

2. On the basis of French’s revised information, what does next year look like? a. What is the break-even point?
The break even unit for the aggregate production is 1,035,686 units. Calculation of the break even points using the new estimates: Breakeven points have been calculated using the formula:
Breakeven number of units = Fixed costs / Contribution margin per unit, where Contribution margin per unit = Selling price – Variable cost per unit

b. What level of operations must be achieved to pay the extra dividend, ignoring union demands? To pay the extra dividend of 50% and to retain the profit of 150,000 we need to have the profit after taxes as 600,000. As half of the revenues go to the government as taxes therefore the total revenues before tax deduction should be equal to 1,200,000.

c. What level of operations must be achieved to meet union demands, ignoring bonus dividends?

d. What level of operations must be achieved to meet both union demands & bonus dividends?

3. Can the break-even analysis help the company decide whether to alter the existing product emphasis?...

...
BillFrenchCase
1. What are the assumptions implicit in Bill French’s determination of his company’s break-even point?
He has assumed that there is only one break-even point for the firm’s three products by taking the average.
Labor Union will not affect the product prices no effect on the break-even analysis.
Constant dividends were given to stockholders.
Production of product “A” will be decreased and the other hand product “C” capacity will be increased.
Sales price will be constant.
2. On the basis of French’s revised information, what does next year look-like:
a. What is the break-even point?
Break-even point for product “C” is 354,545.45 and overall is 1,035,688.31.
b. What level of operations must be achieved to pay the extra dividend, ignoring union demands?
In order to pay the 50% extra dividend and to retain $150,000 profit the firm needs $600,000 profit after taxes and because half of the profit goes through the government the firm needs profit before taxes of $1,200,000.
c. What level of operations must be achieved to meet the union demands, ignoring break-even points?
FC + Union Demands/Unit Contribution to Sales
Union Demands = (6,750,000 x10%) = 675,000
2,970,000 + 675,000/.375
$9,720,000
d. What level of operations must be achieved to meet both dividends and expected union requirements?
FC + Target Dividend + Union Demands/Unit Contribution to...

...RESTRICTED INTERNAL USE ONLY
BILLFRENCHBillFrench 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...

...
Contents
Case Context 1
Case Background 1
Cost-Volume-Profit Analysis 1
Point of View 1
Problem Statement 1
Areas of Consideration 2
The Breakeven Point 2
Implicit Assumptions and Limitations 2
Per Product versus Aggregate Breakeven Point 2
Change in Volume and Fixed Cost 3
Change in Product Mix and Sales Price 3
The Bonus Dividend Plan 3
Union Demand 4
Change in Product Emphasis 4
Recommendations 5
Revised CVP Income Statement 5
Required Levels of Operation 6
Case Context
Case Background
The case of BillFrench is a good illustration to understand the use and limitations of Cost-Volume-Profit (CVP) Analysis. CVP which deals on the relationships of price, costs, volume, and mix of products is a very useful tool for the management to assist them on determining the level of sales, both in number of units and total revenue, which is necessary for the company to cover all its costs using the Breakeven Point Analysis or to achieve a target profit. However, there are assumptions implicit to this approach which could limit the analysis. And these assumptions are the important things BillFrench failed to point out when he presented his breakeven analysis on their meeting. Likewise, he also failed to consider the factors and conditions that could alter his analysis, thus he was not able to address right away the concerns raised by the representatives...

...BillFrenchcase
In this case, BillFrench had gathered information and calculated Break Even Point (BEP) based on few assumptions:
1) Product mix considered constant.
2) Considered that there is just one breakeven point for the company.
3) Fixed and variable cost is assumed to be constant.
4) No inventory.
5) Price assumed to be fixed.
Calculation of breakeven point based on assumptions:
Table 1: Initial Cost analysis
Initial Calculation
Aggregates
A'
B'
C'
Sales at full capacity
(Unit)
2000000
Sales unit
1500000
600000
400000
500000
Unit price
7.2
10
9
2.4
Revenue
10800000
6000000
3600000
1200000
Variable cost/unit
4.5
7.5
3.75
1.5
Contribution margin/unit
2.7
2.5
5.25
0.9
Total variable cost
6750000
4500000
1500000
750000
Fixed cost
2970000
960000
1560000
450000
Fixed cost/unit
1.98
1.6
3.9
0.9
Profit
1080000
540000
540000
0
Ratios:
Variable cost to sales
0.625
0.75
0.41666667
0.625
unit contribution to sales
0.375
0.25
0.58333333
0.375
Utilization to capacity
75.00%
30.00%
20.00%
25.00%
BEP (units)
1100000
384000
297142.857
500000
BillFrench calculation need to be revised, given below are the considerations:
1) Product ‘A’ volume reduced to 1/3.
2) Product ‘C’ sales unit increased with 450000
3) Increase in selling price of ‘C’ to 100%
4) Cost will remain same for each product
5) Will boost fixed cost of at least by $60,000 month.
6) Dealing with...

...in either product units or dollars.
BillFrench, Accountant
The break even analysis is a very important tool to help any firm in deciding on the best operational volume. It requires three types of costs namely the fixed cost, variable cost and selling price (Dayananda, et al, 2002). As BillFrench puts it, “the level of operation at which total costs that is, 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, 1987). There are several assumptions that are made in order to calculate the break even figures since with all the factors considered, it is very hard to compute the figures. In determining the break even figures for the firm, French makes some implicit assumptions. Most of these assumptions are evident in the conversation he is having with the participants at the meeting. In his calculations, Mr. French does not give room for the excepted sales volume increase which according to Cooper, one of the participants from the production department, will increase sales by 20%. He further assumes that the plant capacity is only at 90% utilization implying that it is not fully utilized. However, we learn from Williams (who is from the manufacturing department) that the plant capacity may be at 100% as he argues that in some of the sectors, there...

...1. What are the assumptions implicit in Bill French’s determination of his company’s breakeven point?
There are a number of simplifying assumptions made by BillFrench in his calculations of the breakeven point of his company, Duo – Products Corporation. First, he had assumed that the market conditions will remain the same. Second, his calculations are based on the last year prices; it does not take into account in any change in prices. Third, he also ignores any changes in the fixed and variable costs of the product, which is pointed out by Fred Williams during the meeting. In making the above assumption, he also assumes that the plant capacity will remain the same. Lastly, he has assumed that the sales will be the same as the previous year and also there would be no change in the sales of the different products, i.e. product mix.
2. On the basis of French’s revised information, what does the new year look like:
a. What is the breakeven point
The breakeven point for the new analysis comes out to be 9.64 million units
b. What level of operations must be achieved to pay the extra dividend, ignoring union demands
The level for meeting dividends is 12.80 million units
c. What level of operations must be achieved to meet union demands, ignoring bonus dividends?
The level for meeting union demands is 13.26 million units
d. What level of operations must be...

...Matthew Maskarinec
Strategic Cost Management
BillFrenchCase Analysis
1) 1. In a “normal year,” what is the break-even point in units for the year when performing CVP analysis on a product-by-product basis?
Product A
Product B
Product C
USP (given)
$1.67
$1.50
$0.40
UVC (given)
$1.25
$0.63
$0.25
UCM
$0.42
$0.87
$0.15
FC (given)
$170,000
$275,000
$75,000
BEP (units)
404,762
316,092
500,000
BEunits=1,220,854
Calculations:
UCM: Product A (1.67-1.25)= .42 Product B (1.50-.63)= .87 Product C (.40-.25)= .15
BEP: Product A (170,000/.42)=404,762 Product B (275,000/.87)=316,092
Product C (75,000/.15)=500,000
2) In a “normal year,” what is the break-even point in units for the year assuming the sales mix implied by Exhibit 2? (Be sure to report sales volume for each product.)
Product A
Product B
Product C
USP (given)
$1.67
$1.50
$0.40
UVC (given)
$1.25
$0.63
$0.25
UCM
$0.42
$0.87
$0.15
Sales Mix
462,222
312,000
381,334
BEunits=1,155,556
Calculations:
UCM: (calculated above)
WACM: (.42 *600,000)+ (.87*400,000)+ (.15*500,000)=675,000
675,000/1,500,000= .45
Total BE: 540,000/ .45=1,155,556
Percentage of total sales: A-600,000/1,500,000=.40 B-400,000/1,500,000=.27
C-500,000/1,500,000=.33
Sales Mix: A-1,155,556*.4=462,222 B-1,155,556*.27=312,000
C-1,155,556*.33=381,334
3) Given the information BillFrench received, what is the new break-even point in units for the year given...

...Case Study: BillFrench
1.
Bill has assumed that Duo-Products' relevant range for fixed costs will remain constant even after planned expansion of production capacity. He has also 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. Two other assumptions are that total revenue and total expenses behave in a linear manner over the relevant range. These 2 are standard when Cost Volume Profit analysis is carried out.
2.
a) There is an extra $720,000 a year in fixed costs estimated by Fred Williams for this year. Since 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 as there isn't any information as to whether its relevant range of fixed costs will change, I have left its level of fixed costs unchanged. As a result both A's and B's breakeven points remain the same. For C the breakeven point is 354,545 units. The overall breakeven point is 1,035,686 units.
b) Duo-Products must make a $1.2 million profit before tax to meet this requirement. To do this it must sell 1,372,494 units.
c) An increase in variable costs across the board by 10% would increase the average variable cost to $3.72 per unit. For Duo-Products to break even under these conditions it would need to...