Bill French Case
Bill French case...
Anthony Albert Tiu I.
Bill French the accountant of Duo-Products Corporation has prepared reports for his presentation regarding his analysis of the company’s performance and status. French observed that each unit contributed $2.70 to fixed costs after covering its variable cost. 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 dollar sales volume that was required to break even. Since the variable costs per unit were 62.5% of selling price, French reasoned that 37.5% of every dollar sales was left available to cover fixed cost. Thus, fixed costs of $2,970,000 required sales of $7,920,000 in order to break even. French had prepared copies of his chart and supporting calculations for everyone at the meeting. He explained carefully what he done and explained how the chart pointed to profitable year. It soon became apparent that some of the participants had known in advance what French planned to discuss, they had come to challenge him and take control of the meeting. John Cooper, the production control manager is aiming to increase unit sales by 20% thus increasing its capacity up to 90% thus increasing its fixed cost by $60,000 a month. In addition, he points out that the charts shown may not provide accurate data since it consist of having an average figures rather than individual products. Also, Ray Bradshaw, the assistant sales manager suggested that the product mix was bound to change and would like to see the influence of a price increase in the C line. Fred looks toward an increase in fixed manufacturing costs of $60,000 a month. Anne, the administrative assistant, question the product emphasis, tax inclusions, union demands and dividends .After considering this scenario, Wes Davidson, Bill French Boss, decided to reset the meeting and rework the charts for re-discussion. II.
Point of View Bill French, accountant of Duo-Products Corporation
Statement of the Problem What action should Bill French to project a higher profit after considering all the assumptions made by his colleagues?
To compute the break-even sales for a multi-products firm using cost behavior information.
To use CVP in decision making
To set assumptions implied by the employees of Duo-Products Corporation
To analyze the individual products and see its differences in calculation
Areas of Consideration
Capacity of the plan to be increased by investment of $60,000 per month or around 720,000 per year
Sales Price of C is to be increased by 100% (New Price = $4.80)
Sales volume of C is to be increase by 450,000 units (New Actual sales volume = 500,000+ 450,00 =950,000)
Sales volume of A is reduced to 2/3 to 400,000 units
Recommendation One of the assumptions implied by Bill in his break-even chart indicates that the relevant range will remain constant even there is an increased fixed cost due to an increase in volume capacity. Another assumption that he overlooks consist of only one break-even points (average of 3 products) for the firm making the sales mix percentage of each product to be constant. Based from assumptions on the areas to be considered, it has been found out that the profit will boost by more than 100% if the investment to increase the sales volume of C by 450,000 will be price at $4.80. After considering all the options and have compute for the break-even points of each product, it has been proved that the contribution margin of summed products differs from the new computed value due to the inclusion of sales mix ratio. From the scenario provided, the production of Product A is scaled down but its level of fixed cost has been assumed to be unchanged. To pay extra dividend of 50% and to retain the profit of $150,000, we need to have a profit after taxes of $600,000. As half of the revenues go to the government taxes, the total revenue should be equal to $1,200,000. Break even analysis can be used to decide whether to alter the existing product or not. If we refer to last year’s data, we can see that it is not economically feasible to manufacture product at a selling price of @ $2.40. Therefore, after carrying out relevant cost-volume-profit analyses for companies with multiple products, the management should maximize the sales of the product class with a higher contribution margin, relative to other products. This can be done through an increase on its production volume.
Learning Points The break-even analysis computed provides transparency to help the company analyze which products that performs well and determine which product produces the highest profit with
minimal cost. It also helps us understand and formulate relationship between fixed and variable cost output and evaluate items towards the versatility of its product cost. The line by line analysis informs us about the virtual profitability for each product while the aggregate analysis of product shows whether meeting the target profit is feasible. From a financial point of view, aggregate type of analysis is useful to focus on its overall net profit rather than on its operating profit. On the other hand, line product analysis focus to plan for each product that it allows management to determine which products deserves to be reviewed for evaluation. In some situational cases such as economic downturns, improving the sales of product by manipulating the variable cost can used to endorse product sales
Case Analysis Pricing Structure
Exhibit A: Existing Conditions
Plant Capacity (units) Total Fixed Cost ($) Sales Volume (units) Total Revenue Capacity Utilization Average Unit Price Average Unit Variable Cost Average Unit Contribution Margin Sales Break Even sales Point S$ Break Even sales (Units)
2,000,000 per year 2,970,000.00 1,500,000.00 10,800,000.00 0.75 7.20 4.50 0.375 7,920,000.00 1,100,000.00
Exhibit B: Change in Product Structure (Areas of Consideration)
New Sales Volume Sales Price (Ave) Sales Revenue Sales Mix ratio Variable Cost Variable Cost to Sales Unit Contribution to Sales Utilization of Capacity Total Variable Cost Fixed Cost Profit BEP (Unit) BEP (Dollars) CM Ratio Contribution Margin CM/unit
A 400,000.00 10.00 4,000,000.00 0.23 7.50 0.75 0.25 0.20 3,000,000.00 960,000.00 40,000.00 384,000.00 3,840,000.00 0.25 1,000,000.00 2.50
B 400,000.00 9.00 3,600,000.00 0.23 3.75 0.42 0.58 0.20 1,500,000.00 1,560,000.00 540,000.00 297,142.86 2,674,285.71 0.58 2,100,000.00 5.25
C Total 950,000.00 1,750,000.00 4.80 6.94 4,560,000.00 12,160,000.00 0.54 1.50 3.39 0.31 0.49 0.69 0.51 0.48 0.88 1,425,000.00 5,925,000.00 1,170,000.00 3,690,000.00 1,965,000.00 2,545,000.00 354,545.45 1,035,688.31 1,701,818.18 0.69 0.51 3,135,000.00 3.30 3.56
Exhibit C: Individual Break Even Analysis
Sales Volume Sales Price Sales Revenue Variable Cost Variable cost to Sales Unit Contribution to Sales Utilization of Capacity Total Variable Cost Fixed Cost Profit BEP (unit)
A B C Total 600,000.00 400,000.00 500,000.00 1,500,000.00 10.00 9.00 2.40 7.20 6,000,000.00 3,600,000.00 1,200,000.00 10,800,000.00 7.50 3.50 1.50 4.50 0.75 0.42 0.63 0.63 0.25 0.58 30.00 20.00 4,500,000.00 1,500,000.00 960,000.00 1,560,000.00 540,000.00 540,000.00 384,000.00 297,142.00
0.38 25.00 750,000.00 450,000.00 0.00 500,000.00
0.38 75.00 6,750,000.00 2,970,000.00 1,080,000.00 1,100,000.00
Exhibit D: Analysis with versatile cost (Taxes , Dividends, expected union demands, question on product emphasis)
What level of operations must be achieved to pay the extra dividend , ignoring union demands Fixed Cost Target Net Profit Contribution Margin ( Sales - Variable cost) 6.94-3.39 Sales (units) = (Fixed + Targeted Net Profit) / CM/unit
3,690,000.00 1,200,000.00 3.55
What level of operations must be achieved to pay extra dividend, ignoring union demands Fixed Cost Net Income Taxes Target Net Profit Contribution Margin ( Sales - Variable cost) 6.94-3.39*1.1
3,690,000.00 450,000 450,000 900,000 3.22
Sales (units) = (Fixed + Targeted Net Profit) / CM/unit What level of operations must be achieved to meet both dividends and expected union requirements Fixed Cost Target Net Profit Contribution Margin ( Sales - Variable cost) 6.94-3.39*1.1 Sales (units) = (Fixed + Targeted Net Profit) / CM/unit
3,690,000.00 1,200,000.00 3.22