BILL FRENCH CASE

Submitted By: Pratichi Sharan

Section B
Question 1: What are the assumptions implicit in Bill Frenchs determination of his
companys break-even point?
The following assumptions are implicit in Bill Frenchs determination:
He has assumed that there is just one breakeven point for the firm (by taking the
average of the products!
He has also assumed that the sales mi" will remain constant
He has also assumed that the sales mi" will remain constant# Total revenue and total
e"penses behave in a linear manner over the relevant range
$ince the capacity is being e"panded to increase production of %roduct &' it could be
assumed that this increase should be allocated to this product# %roduction of %roduct
( is to be scaled down' but its level of fi"ed costs has been assumed to be
unchanged
Question 2: n the basis of Frenchs revised information! "hat does ne#t year look
like?
a$ What is the break-even point?
&alculation of the break even points using the new estimates:
Breakeven points have been calculated using the formulae:
Breakeven number of units ) Fi"ed costs * &ontribution margin per unit
+here
%ontribution mar&in per unit ) $elling price , -ariable cost per unit
'&&re&at
e ('( (B( (%(
$ales at full capacity (units! .//////
$ales -olume (units! 012//// 3///// 3///// 42////
5nit $ales %rice 67#438 60/ 64 63#8
$ales 9evenue
60.07///
/
63/////
/
67////
/
6327///
/
-ariable &ost per unit 6#82 61#2 6#12 60#2
&ontribution margin per unit 6#27 6.#2 62#.2 6#
Total -ariable &osts 624.2///
6/////
/
602////
/
603.2//
/
Fi"ed &osts 674//// 647////
6027///
/
6001///
/
%rofit 6.232/// 63//// 623////
60472//
/
9atios:
-ariable cost to sales
/#38104/
7 /#12
/#30777
1 /#0.2
5nit contribution to sales
/#20.8/4
3 /#.2
/#28
/#7812
5tili:ation of capacity 81#2/; ./; ./; 31#2/;
Break <ven %oint (units! 0/2787 83/// .4103 23232
The break even unit for the a&&re&ate production is 0/2787 units#
b$ What level of operations must be achieved to pay the e#tra dividend! i&norin&
union demands?
(nswer#
To pay the e"tra dividend of 2/; and to retain the profit of 602//// we need to have the
profit after ta"es as 67/////# (s half of the revenues go to the government as ta"es
therefore the total revenues before ta" deduction should be e=ual to 60./////#
>perating income after ta"es (632////
dividend ? 602//// profits! 6 7/////
$elling price 67#42
-ariable cost per unit 6#4
&ontribution margin per unit 6#27
>perating income before ta" (assuming
2/; of the revenue goes as ta" to the
government! 6 0./////
Total Fi"ed &ost 674////
@o of units re=uired to be produced )
(F& ? >perating income!*&ontribution 01242
c$ What level of operations must be achieved to meet union demands! i&norin&
bonus dividends?
(nswer#
>perating income after ta"es (632////
dividend ? 602//// profits! 632////
$elling %rice 67#42
-ariable cost per unit 6#1
&ontribution margin per unit 6#.
>perating income before ta" (assuming
2/; of the revenue goes as ta" to the
government! 64/////
Total Fi"ed &ost 674////
@o of units re=uired to be produced )
(F& ? >perating income!*&ontribution 03312
d$ What level of operations must be achieved to meet both union demands )
bonus dividends?
(nswer#
>perating income after ta"es (632////
dividend ? 602//// profits! 67/////
&ontribution margin per unit 6#.
>perating income before ta" (assuming
2/; of the revenue goes as ta" to the
government! 60./////
Total Fi"ed &ost 674////
@o of units re=uired to be produced )
(F& ? >perating income!*&ontribution 02.80.2
Question *: %an the break-even analysis help the company decide "hether to alter the
e#istin& product emphasis? What can the company afford to invest for additional +%,
capacity?
(nswer:
Break even analysis can be used to decide whether to alter the e"isting product emphasis or
not# For e"ample in this case' if we refer last years data' we can see that the product & is
not economically feasible to manufacture at 6.#3/ * unit# Following table gives the analysis
for checking whether the company can afford to invest in additional A&B capacity#
-otal number of units
produced 42////
.ale price 63#8
.ale revenues
6327///
/
/ariable cost 60#2/
-otal variable cost
603.2//
/
%ontribution
602//
/
Fi#ed cost
6001///
/
0nvestment the company
can
afford
60472//
/
Question 1: %alculate each of the three products break even points usin& the data$
Why is the sum of these three volumes not e2ual to the 1!133!333 units a&&re&ate
break-even volume?
(nswer:

'&&re&at
e +', +B, +%,
$ales at full capacity (units! .//////
(ctual $ales -olume (units! 02///// 7///// 3///// 2/////
5nit $ales %rice 61#. 60/ 64 6.#3

$ales 9evenue
60/8////
/
67/////
/
67////
/
60.////
/
-ariable &ost per unit 63#2 61#2 6#12 60#2
&ontribution margin per unit 6.#1 6.#2 62#.2 6/#4

Total -ariable &osts 6712////
632////
/
602////
/ 612////
Fi"ed &osts 6.41//// 647////
6027///
/ 632////

%rofit 60/8//// 623//// 623//// /
9atios:
-ariable cost to sales /#7.2 /#12
/#30777
1 /#7.2
5nit contribution to sales /#12 /#.2
/#28
/#12
5tili:ation of capacity 12#//; /; 28; 1#2/;
Break <ven %oint (units! 00///// 83/// .4103 2/////
Question 4: 0s this type of analysis of any value? For "hat can it be used?
BreakCeven analysis is important in businesses in providing important benchmarks for longC
term planning# This type of analysis helps you to boost your sales' utili:e your production
and operations# (lso' it helps to understand the relationship between your fi"ed and variable
costs' output and profit# (ccording to Sam Ashe-Edmunds, >nce a company calculated
their various breakCeven points' they can already set their longCterm pricing strategies#B >ne
can decide to lower prices that results in more sales' bringing more total' or gross' profits' to
a business# Doreover' knowing your breakeven points will bring in potential investors by
providing them a better picture of their potential return on their investments by better
managing your costs# BreakCeven points in your business plan to determine if they are
interested in your opportunity# http:**smallbusiness#chron#com*importanceCbreakingCevenC
businessCfinanceC70.#html
However' there are some setbacks in using the breakeven analysis# (ccording to the
website DB( E &o# there are various limitations to the break even analysis, which are that:
http://www.mbaco.com/resources/finance/break-even-analysis
Break even analysis is a supply-side analysis and has nothing to do with sales variations.
Break even analysis works well in the short run as the increase in the scale of production may
increase the fixed costs.
Break even analysis also assumes that variable costs are constant for every unit.
Break even analysis assumes that the amount of goods produced is equal to the amount of
goods sold.
t is an undisputable fact that break even analysis is the simplest analytical tool that helps provide an
overview into the dynamic relationships of sales, costs and profits. !ence, it also follows that it can be
not the best alternative for businesses with a high complex mix of products. "evertheless, the
breakeven point analysis is still a useful tool in making business decisions sub#ect to limitations as per
above.