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Bill French Essay

723 words - 3 pages

Strategic cost analysis & management:
Case Study Bill French Accountant Takeaways

Bill French, aggregated BEP
basic Sales volume Unit sales price (+) Sales revenue Unit var. cost (-) Total VC (=) Contribution margin (-) Fixed cost (=) Operating profit (-) Taxes (=) Net Profit after taxes Dividends (=) Net Profit 1 076 406 1,159 1 247 400 0,56 607 401 640 000 640 000 0 0 0 0 0 basic+ dividend 1 328 688 1,159 1 539 760 0,56 749 760 790 000 640 000 150 000 75 000 75 000 75 000 0 basic+ union 1 189 275 1,159 1 378 200 0,62 738 200 640 000 640 000 0 0 0 0 0 + dividend + union 1 470 093 1,159 1 701 216 0,62 911 216 790 000 640 000 150 000 75 000 75 000 75 000 0

Bill French, line-by-line BEP
basic Sales volume at aggregated BEP 1 076 406 basic+ union 1 189 275

BEP A (in units) BEP B (in units) BEP C (in units)

170 000/0,42= 404 762 275 000/0,88 = 314 286 195 000/0,55 = 354 545

170 000/0,30 = 576 271 275 000 / 0,81 = 338 462 195 000/0,53 = 371 429

Bill French, ...view middle of the document...

This breakeven calculation will remain valid as long as the sales mix remains constant.

How to compute BEP in multiproduction contexts
Define the assumed sales mix (P1 % of total sales, P2 % of total sales, P3 % of total sales) Calculate the weighted unit contribution margin (%salesP1 x UCMP1)+ (%salesP2 x UCMP2)+ (%salesP3 x UCMP3) BEP (unit) = Total FC ÷ weighted UCM BEP ($) = Total FC ÷ weighted UCM rate
!!! Weighted UCM rate = weighted UCM ÷ weighted turnover (and NOT weighted (UCM ÷ turnover))

Learning Objective 2
Using CVP in decisionmaking

The use of break-even analysis
BEP gives a measure of risk, not of profitability. BEP enables to assess the degree of risk of a company’s cost structure. A planning tool, useful to forecast financial needs.

CVP analysis is not for “discontinuing” decisions
… a negative/positive UCM is not the only relevant criteria to decide whether or not to drop a product. CVP analysis is insufficient for discontinuing decisions (outsourcing, change in the product portfolio, …): Need to know the nature of fixed costs (direct/indirect) What are direct –avoidable- versus indirect – largely unavoidable- costs?

CVP analysis is not for comparing products
Basic UCMs usually do not tell us which products should be pushed Contrary to UCMs, unit contribution margins per unit of scarce resource are not misleading UCMs may be used when all products have the same scarce resource’s consumption.

Line-by-line versus aggregate analysis
Line-by- line analysis tells us about virtual profitability for each product.
From manufacturing and sales point of view, it is very useful to make planning for each product.

Aggregate analysis answers whether we can meet our profit targets.
From the financial point of view, it is very useful to target the aggregate profit level. Focus on net profit rather than operating profit.

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