Arash Azarmi, Payhem Bahreyni, Joel Mann, Erica Morey, Michael Philpott ACCT 545 Prof.

Schatzberg March 19, 2013 Bill French Case 1. Bill French's assumptions, most of which assumed constancy of variables: Sales volume from the previous year will remain the same. Sales mix will remain constant. No additional required capital No change to dividend payout No change in labor costs No change in product prices No change in fixed costs for production Constant values based off of aggregate averages across all product lines, rather than looking at products separately.

2. Next Year's Projections (see Appendix 1 for complete calculations)

2a w/o Dividend 2a w/ Dividend 245,776 265,597 245,776 265,597 584,947 630,794 1,076,499 1,161,988 2b 284,178 284,178 676,344 1,244,700 2c 282,853 282,853 671,777 1,237,483 2d 314,754 314,754 747,541 1,377,049

Quantity A Quantity B Quantity C Total Quantity

Formula used: [QA(PA-KA)] + [QB(PB-KB)] + [QC(PC-KC)] - Total FC = Target Net Income We adjusted projected production quantities as follows: Product A: 400,000 Product B: 400,000 Product C: 950,000 To find sales quantities, we expressed all products in terms of Quantity A. For 2b, we set the target net income to $100,000 to account for $75,000 dividend payout and $25,000 target retained earnings. For 2c, we set target net income at $25,000 to account for target retained earnings and increase VC of each unit by 10%. For 2d, we set the net income to $100,000 to account for $75,000 dividend payout and $25,000 target retained earnings and increase VC of each unit by 10%.

3. Product Emphasis and Additional Capacity 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 years data, we can see that the product C is not economically feasible to manufacture at $0.40 / 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 950,000 $0.8 $760,000 $0.25 $237,500 $522,500 $175,104 $347,396

4. Value of Breakeven Analysis The value of breakeven analysis presents the greatest value by incorporating decision making options within the analysis to provide ramifications of production requirements that various adjustments to variable and fixed costs of those options. It does this by determining the minimum production level required for sales to cover production costs. It also is a means to determine cost-volume relationships. The aggregate analysis shows presents perspective on the feasibility of meeting the target net income. The analysis of each product informs us about the virtual profitability for each product. The line item analysis provides value in operational planning for each product, assisting management to determine product profitability and assists in determining price and production quantity changes as necessary.

Appendix 1: Calculations for Problem #2 2a. Breakeven Analysis Breakeven with no Dividend [QA(1.67-1.25)] + [QA(1.5-.625)] + [2.38QA(.8-.25)] - Total FC = 0 .42QA + .875QA + 1.309QA - Total FC = 0 2.604 QA - 640,000 = 0 QA = 245,776 QB = 245,776 QC = 584,947 Total Q = 1,076,499 Breakeven with $50,000 Dividend 2.604 QA - 690,000 = 0 QA = 265,597 QB = 265,597 QC = 630,794 Total Q = 1,161,988

Break-even Analysis Sales at Full Plant Capacity (units) Projected level of operations (units) Average unit selling price ($) Total Sales Revenue ($) Variable Unit Cost ($) Total Variable Cost ($) Fixed Costs ($) Net Profit ($) New Break-even Quantity (No Dividend) New Break-even Quantity (50K Dividend) Aggregate 2,000,000 1,750,000 1.32 2,028,000 0.75 987,500 640,000 0 1,076,499 1,161,988 A 400,000 1.67 668,000 1.25 500,000

Product Lines B 400,000 1.5 600,000 0.625 250,000

C 950,000 0.8 760,000 0.25 237,500

245,776 265,597

245,776 265,597

584,947 630,794

2b. Level of Operations w/ extra dividend and w/o union demands We set the net income to $100,000 to account for $75,000 dividend payout and $25,000 target retained earnings.

2.604 QA - 640,000 = 100,000 2.604 QA = 740,000 QA = 284,178 QB = 284,178 QC = 676,344 Total Q = 1,244,700
Extra Dividend Analysis Sales at Full Plant Capacity (units) Projected level of operations (units) Average unit selling price ($) Total Sales Revenue ($) Variable Unit Cost ($) Total Variable Cost ($) Fixed Costs ($) Net Profit ($) Aggregate 2000000 1,750,000 1.32 2,028,000 0.75 987,500 640,000 100,000 A 400,000 1.67 668,000 1.25 500,000 Product Lines B 400,000 1.5 600,000 0.625 250,000

C 950,000 0.8 760,000 0.25 237,500

New Break-even Quantity (75K Dividend + 25K Working Capital) 1,244,700

284,178

284,178

676,344

2c. Level of Operations w/ union demands and w/o extra dividend We set net income at $25,000 to account for target retained earnings. We increase VC of each unit by 10%. [QA(PA-KA)] + [QB(PB-KB)] + [QC(PC-KC)] - Total FC = Target Net Income [QA(1.67-1.375)] + [QA(1.5-.6875)] + [2.38QA(.8-.275)] - 640,000 = 25,000 .295QA + .8125QA + 1.2498QA - 640,000 = 25,000 2.351QA - 640,000 = 25,000 QA = 282,853 QB = 282,853 QC = 671,777 Total Q = 1,237,483

Union Demand Analysis Sales at Full Plant Capacity (units) Projected level of operations (units) Average unit selling price ($) Total Sales Revenue ($) Variable Unit Cost ($) Total Variable Cost ($) Fixed Costs ($) Net Profit ($) New Break-even Quantity (No Dividend with Union Demands) Aggregate 2000000 1,750,000 1.32 2,028,000 0.78 1,086,250 640,000 25,000 A 400,000 1.67 668,000 1.375 550,000

Product Lines B 400,000 1.5 600,000 0.6875 275,000

C 950,000 0.8 760,000 0.275 261,250

1,237,483

282,853

282,853

671,777

2d. Level of Operations w/ union demands and w/ extra dividend We set the net income to $100,000 to account for $75,000 dividend payout and $25,000 target retained earnings. We increase VC of each unit by 10%. [QA(PA-KA)] + [QB(PB-KB)] + [QC(PC-KC)] - Total FC = Target Net Income [QA(1.67-1.375)] + [QA(1.5-.6875)] + [2.38QA(.8-.275)] - 640,000 = 100,000 .295QA + .8125QA + 1.2498QA - 640,000 = 100,000 2.351QA - 640,000 = 100,000 QA = 314,754 QB = 314,754 QC = 747,541 Total Q = 1,377,049

Combination Analysis Sales at Full Plant Capacity (units) Projected level of operations (units) Average unit selling price ($) Total Sales Revenue ($) Variable Unit Cost ($) Total Variable Cost ($) Fixed Costs ($) Net Profit ($) New Break-even Quantity (Combination Demands) Aggregate 2,000,000 1,750,000 1.32 2,028,000 0.78 1,086,250 640,000 100,000 A 400,000 1.67 668,000 1.375 550,000

Product Lines B 400,000 1.5 600,000 0.6875 275,000

C 950,000 0.8 760,000 0.275 261,250

1,377,049

314,754

314,754

747,541