Bill French Assignment

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

Sales at full capacity (units) Sales Volume (units) Unit Sales Price

Aggreg ate

"A"

"B"

"C"

2000000 1750000 $6.948

400000 $10

400000 $9

950000 $4.8

Sales Revenue Variable Cost per unit Contribution margin per unit Total Variable Costs Fixed Costs Profit Ratios: Variable cost to sales Unit contribution to sales Utilization of capacity Break Even Point (units)

$121600 00 $3.385

$40000 00 $7.5

$36000 00 $3.75

$45600 00 $1.5

$3.56

$2.5

$5.25

$3.3

$592500 0 $369000 0

$30000 00 $96000 0

$15000 00 $15600 00

$14250 00 $11700 00

$254500 0

$40000

$54000 0

$19650 00

0.48719 06 0.51280 94 87.50% 1035686

0.75 0.25 20% 384000

0.4166 67 0.5833 33 20% 297143

0.3125 0.6875 47.50% 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) Selling price Variable cost per unit Contribution margin per unit

$ 600000 $6.95 $3.39 $3.56

Operating income before tax (assuming 50% of the revenue goes as tax to the government) Total Fixed Cost

$ 1200000 $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) Selling Price Variable cost per unit Contribution margin per unit

$450000 $6.95 $3.73 $3.2

Operating income before tax (assuming 50% of the revenue goes as tax to the government) Total Fixed Cost

$900000 $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) Contribution margin per unit

$600000 $3.2

Operating income before tax (assuming 50% of the revenue goes as tax to the government) Total Fixed Cost

$1200000 $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 Sale price Sale revenues Variable cost Total variable cost Contribution Fixed cost Investment the company can afford

950000 $4.8 $45600 00 $1.50 $14250 00 $31350 00 $11700 00 $19650 00

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 Sales at full capacity (units) Actual Sales Volume (units) Unit Sales Price Sales Revenue Variable Cost per unit Contribution margin per unit Total Variable Costs Fixed Costs

“A”

“B”

“C”

1500000 $7.2

600000 $10

400000 $9

500000 $2.4

$108000 00 $4.5

$60000 00 $7.5

$36000 00 $3.75

$12000 00 $1.5

$2.7

$2.5

$5.25

$0.9

$675000 0 $297000 0

$45000 00 $96000 0

$15000 00 $15600 00

$75000 0 $45000 0

2000000

Profit Ratios: Variable cost to sales Unit contribution to sales Utilization of capacity Break Even Point (units)

$108000 0

$54000 0

0.625

0.75

0.375 75.00% 1100000

0.25 30% 384000

$54000 0 0.4166 67 0.5833 33 58% 297143

0

0.625 0.375 37.50% 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