BILL FRENCH CASESubmitted 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

Aggregate "A" "B" "C"Sales at full capacity (units) 2000000

Sales Volume (units) 1750000 400000 400000 950000Unit Sales Price $6.948 $10 $9 $4.8

Sales Revenue $12160000 $4000000 $3600000 $4560000Variable 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 $5925000 $3000000 $1500000 $1425000Fixed Costs $3690000 $960000 $1560000 $1170000

Profit $2545000 $40000 $540000 $1965000

Ratios:Variable cost to sales 0.4871906 0.75 0.416667 0.3125

Unit contribution to sales 0.5128094 0.25 0.583333 0.6875Utilization 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) $ 600000Selling price $6.95Variable cost per unit $3.39Contribution margin per unit $3.56

Operating income before tax (assuming 50% of the revenue goes as tax to the government) $ 1200000Total 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) $450000Selling Price $6.95Variable cost per unit $3.73Contribution 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) $600000Contribution margin per unit $3.2

Operating income before tax (assuming 50% of the revenue goes as tax to the government) $1200000Total 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 950000Sale price $4.8Sale revenues $4560000Variable cost $1.50Total variable cost $1425000Contribution $3135000Fixed cost $1170000Investment 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:

Aggregate “A” “B” “C”Sales at full capacity (units) 2000000 Actual Sales Volume (units) 1500000 600000 400000 500000Unit Sales Price $7.2 $10 $9 $2.4 Sales Revenue $10800000 $6000000 $3600000 $1200000Variable Cost per unit $4.5 $7.5 $3.75 $1.5Contribution margin per unit $2.7 $2.5 $5.25 $0.9 Total Variable Costs $6750000 $4500000 $1500000 $750000Fixed Costs $2970000 $960000 $1560000 $450000 Profit $1080000 $540000 $540000 0Ratios: Variable cost to sales 0.625 0.75 0.416667 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