Bill French - Eve - Version 2
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Case Study: BILL FRENCH Joanne Lazareto Judy Liu Evelyn Rose Rose Lumbis Lumb is Larissa Nepomuceno Nepomuceno February 4, 2012
OUTLINE Case Background Statement of the Problem Objective of the Case Question and Answer Conclusion Recommendation
CASE BACKGROUND Duo-Products
Corporation manufacturing company
Bill French newly hired staff accountant for
six months - doing routine types of analytical work - a business school graduate - considered by his associates to be quite capable and unusually conscientious
CASE BACKGROUND 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. Bill French
CASE BACKGROUND French's Observations:
Each unit's contribution to Fixed Costs after covering Variable Costs
$2.70
Units
1,100,000 units
to be sold to break even
Variable Cost per unit
62.50% of selling price
Fixed Cost portion of sales price
37.50% of selling price
Required sales to break even
$7,920,000.00
Fixed Cost
$2,970,000
French's Conclusions (See: Exhibit 1) The
firm was operating at a fair margin above break even
Pre-tax profits increased rapidly as volume increased
CASE BACKGROUND Exhibit 1: Break-Even Chart Total Business Break-even
Last year
Sales revenue
15,000
Total costs
12,000 s r a l l o
D
f o s d n a s u o h T
PROFITS
Plant capacity
2 million units/year
Past years operations
1.5 million units
Ave. unit selling price
$ 7.20
Total
$ 2,970,000
fixed costs
9,000 Variable costs
LOSSES 6,000
Ave. unit variable cost
Margin of safety
3,000
Fixed costs
0 400 2,000 10
20
800 4,000 30
6,000 40
1,200 8,000 50
60
1,600 10,000 70
Sales Performances in Thousands
2,000
12,000 80
14,000 90
100
# of Units (000) $ of Sales (000) % Capacity
$ 4.50
CASE BACKGROUND Meeting
in Duo-Products Corporation: Exhibit 2:
Meeting
Participants
Bill French
Staff Accountant
Wes Davidson
Controller
John Cooper
Production Control
Fred Williams
Manufacturing
Ray Bradshaw
Assistant Sales Manager
Arnie Winetki
General Sales Manager
Anne Fraser
Administrative Assistant to the President
CASE BACKGROUND Exhibit 3: Product Class Cost Analysis Normal Year Aggregate
A
B
C
Sales at full capacity (units)
2,000,000
Actual sales volume (units)
1,500,000
600,000
400,000
500,000
$ 7.20
$ 10.00
$ 9.00
$ 2.40
10,800,000
6,000,000
3,600,000
1,200,000
4.50
7.50
3.75
1.50
6,750,000
4,500,000
1,500,000
750,000
Fixed costs
2,970,000
960,000
1,560,000
450,000
Profit
1,080,000
540,000
540,000
0
0.625 0.375 75%
0.75 0.25 30%
0.42 0.58 20%
0.625 0.375 25%
Unit sales Total
price
sales revenue
Variable cost per unit Total
variable cost
Ratios: Variable cost to sales Unit contribution to sales Utilization of capacity
CASE BACKGROUND Additional inputs from other meeting participants: John Cooper - Production Control
Increase unit sales by 20% and in the process push capacity to 90%. Compute on an individual product basis to distinguish the three product type. To be reflected in the chart: Figures for each of the three (A,B,C) product types.
CASE BACKGROUND Additional inputs from other meeting participants: Fred Williams - Manufacturing
Manufacturing got an approved additional investments increasing fixed costs by at least $60,000 a month ($ 720,000 per year). Pushing plant capacity to 90% may not be that easy because there are places (in the plant) which already reached their limits. To be reflected in the chart: Increase in fixed cost. FC= 2,970,000 + (12 x P60,000)= P3,690,000
CASE BACKGROUND Additional inputs from other meeting participants: Ray Bradshaw Assistant Sales Manager
Big shift in product-mix: - A line is losing. We will be lucky to hold up to 2/3 of its volume next year. We expect to pick-up the 20,000 units that we lose. (Increase sales by 20,000) - B line is solid for years. No expected change. (400,000) - C. We expect 250,000 units more. (in sales)
CASE BACKGROUND Additional inputs from other meeting participants: Arnie Winetki - General Sales Manager On product pricing Double
the price for C with no change in cost. Reasons for increasing price for C: a. Current price is inconsistent and out-of-line (too low) considering our reputation for quality.
b. If we dont increase price for C, well be swamped (increased demand) and we cant handle it. (500,000 units approximately of unsatisfied orders). To be reflected in the chart: Change price of C to $4.80 $2.4 x 2 = $4.80
CASE BACKGROUND Additional inputs from other meeting participants: Anne Fraser - Administrative Assistant to President On profit 1. On Net profit after taxes.
Last years profit is $900,000, but half ($450,000) went to taxes. $300,000 were paid to stockholders as dividends. (Approximate profit after tax was only $450,000) Assumption: Tax= 50% of Net Profit Before Tax (After dividend payments, only $150,000 was left) Target for this year: $600,000 after tax ($1,200,000 before tax) Need to increase profit after taxes by $150,000 more because of plan to give out 50% more dividends because of the anniversary year. ($450,000 dividends)
CASE BACKGROUND Additional inputs from other meeting participants: Anne Fraser - Administrative Assistant to President 2.
On union demands.
Meeting union demands meant increase in variable costs by 10% across the board. ( This may eat-up on bonus dividends) Company can give to union as long as this translates to increased revenue for the Company. This will necessarily increase the Companys break-even point. The Companys profit should be treated as a fixed cost.
CASE BACKGROUND Additional inputs from other meeting participants: Anne Fraser - Administrative Assistant to President 3.
On changing product-emphasis.
Product contribution of A line is the lowest among three. Solution: Shift some assets from A to C. Wes Davidson (Controller): Bill, you rework your chart. The chart is based on a series of assumptions. Try to set those assumptions in black and white. Additional, insert in the chart the following: Unit sales increase, change in product mix, price change in C, increase in fixed manufacturing costs of $60,000 a month, taxes, dividends and product emphasis. Compute also for individual products.
STATEMENT OF THE PROBLEM What should be Bill Frenchs revised cost-volume-profit
(CVP) analysis after his colleagues provided additional information, which he must consider in his study?
OBJECTIVES OF THE CASE STUDY To
apply the cost-volume-profit analysis to:
determine the companys break-even point; and determine the level of operations that must be achieved, given specific business conditions.
Q UESTION & ANSWER 1)
What are the assumptions implicit in Bill Frenchs determination of his companys break-even point? The following are Bill Frenchs assumptions: a.
There is just one
break-even point for the firm.
b.
The
c.
The total revenue and total expenses behave in a
sales mix will remain constant and there will be no substantial change in product prices. linear manner over the
relevant range. d.
There
will be no significant changes in the business/operations (e.g. sales volume will be maintained, constant dividends for the stockholders, labor union will not affect costs).
e.
The
increase in capacity will be allocated to Product C since the production of this product will be increased. The production of Product A is to be decreased, but its level of fixed costs is assumed to be unchanged.
Q UESTION & ANSWER In concept, the following assumptions commonly underlie CVP analysis: a.
Selling price is constant. The price of a product or service will not change as volume changes.
b.
Costs are linear and can be accurately divided into variable and fixed elements. The variable element is constant per unit, and the fixed element is constant in total over the entire relevant range.
c.
In multiproduct companies, the sales mix is constant.
d.
In manufacturing companies, inventories do not change. The number of units produced equals the number of units sold.
Reference:
Managerial Accounting by Garrison/Noreen/Brewer, 13 th edition
Q UESTION & ANSWER 2)
On the basis of Frenchs revised information, what does next year look like? a. What is the break-even point?
Break-even point Unit contribution margin
= Fixed expenses / Unit contribution margin = Unit selling price Variable cost per unit
Q UESTION & ANSWER 2)
On the basis of Frenchs revised information, what does next year look like? b. What level of operations must be achieved to pay the extra dividend, ignoring union demands? Unit
sales to attain the target profit = ( Target profit + Fixed expenses) Unit contribution margin
Target profit
Fixed expenses Unit contribution margin
-
1,200,000 (profit before tax)* 3,690,000 3.56
Unit sales to attain the target profit = 1,373,596 units
*
-> Net operating income x 2 -> Profit is divided almost evenly between the firm and t he government -> Case given
Q UESTION & ANSWER 2)
On the basis of Frenchs revised information, what does next year look like? c. What level of operations must be achieved to meet the union demands, ignoring bonus dividends? Unit
sales to attain the target profit = ( Target profit + Fixed expenses) Unit contribution margin
Target profit
-
900,000 (profit before tax)
Fixed expenses Unit contribution margin
-
3,690,000 3.22
Unit sales to attain the target profit = 1,423,571 units
Q UESTION & ANSWER 2)
On the basis of Frenchs revised information, what does next year look like? d. What level of operations must be achieved to meet both dividends and expected union requirements? Unit
sales to attain the target profit = ( Target profit + Fixed expenses) Unit contribution margin
Target profit
-
1,200,000 (profit before tax)
Fixed expenses Unit contribution margin
-
3,690,000 3.22
Unit sales to attain the target profit = 1,516,615 units
Q UESTION & ANSWER 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?
Yes, Break-even analysis is useful for company in deciding the product emphasis Product C's Price
Contribution Margin
Old (2.4)
New (4.8)
0.9
3.3
Total Units
950,000
950,000
Fixed cost can be covered
855,000
3,135,000
Current fixed cost
450,000
450,000
Maximum Investment
405,000
2,685,000
Profit Loss from A
500,000
500,000
Not Possible
2,185,000
Max Investment if A's loss taken
Q UESTION & ANSWER 4)
Calculate each of the three products break-even points using the data in Exhibit 3? Why is the sum of these three volumes not equal to the 1,100,000 units aggregate break-even volume?
Product A = 384,000 units Product B = 297,143 units Product C = 500,000 units The
sum total is not equal to the 1,100,000 units aggregate breakeven volume because each product has a different contribution margin ratio and different level of fixed costs and sales volume.
Q UESTION & ANSWER 5)
Is this type of analysis of any value? For what can it be used?
Break-even analysis is
a basic tool that can be used by managers to determine the level of sales that is required for the company to start earning a profit. It allows managers to see how changing sales prices and costs affect their profits. It will help
understand and formulate the relationship between costs (fixed and variable), output and profit It will help to quickly
observe profit levels at different output
In
a wide product range, the analysis helps to find out which products are performing well and which are leading to losses The
technique can be used to set sales targets and/or prices to generate target profits
CONCLUSION & RECOMMENDATION xyz
END OF PRESENTATION Thank You
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