Bill French Case
Q#1 What are the assumptions implicit in Bill French’s determination of his company’s break-even point?
1. He assumed average details of all the company’s products combined in one break-even point. NO break-even point for individual product.
2. Next year’s profit is assumed based on same level of targets, without considering other plans for the products, additional dividends or additional variable cost due to union demand.
Q#2 On the basis of French’s revised information, what does next year look like?
Changes for next year:
a. Boost sales by 20% at 90% capacity
b. Fixed cost to increase by 60,000/month
c. Last year’s profit = 900,000
To add 50% to 300,000 dividends
600,000 after tax
d. Company’s profit to be considered fixed cost
e. Shift assets of product A to C
| Aggregate | “A” | “B” | “C” |
Actual Sales Volume | 1,800,000 | 400,000 | 400,000 | 1,000,000 |
Unit Sale Price | 7.93 | 10.00 | ...view middle of the document...
C. What level of operations must be achieved to meet the union demands, ignoring bonus?
Target Profit in units = Fixed Cost + Target Profit
= 4,770,000 + 2,590,000/ 2.98 ( 10 % increase in VC across the board)
D. What level of operations must be achieved to meet both dividends and expected union requirements?
Target Profits in Units: =Fixed Cost +Target Profit/ Contribution Margin
=4,770,000 + 2,740,000 / 2.98
3. Calculate each of the three products’ break-even points using the date in Exhibit 3. Why is the sum of these three volumes not equal to 1,100,000 units aggregated break-even volume?
Product “A” - 384,000
Product “ B” – 297,143
Product “ C” – 500,000
The total break-even point for all the products is not equal to 1,100,000 because the contribution margin is based on an average variable cost of the 3 products. Product C is already at its break-even point. Getting the average of all three products, there is possibility of an uneven calculation of the real variable cost per product. Therefore, the aggregate cost break-even point can mislead the team as to how product should move and how much it should contribute to the company’s profit.
4. IS this type of analysis of any value?
The break-even analysis can help us figure out the relationship between cost , fixed and variable. It can help us set a clear view on the company’s next step on its decision making. It can help the managers analyse which product to boost or to maybe to lessen cost, all on the goal of gaining remarkable profits. It can help the company set profit target as well, where it can also consider other costs such as dividends, tax, or even union demands.
Output Leah Rose M. Grepo
When would the sum of the break-even quantities for each of a company’s products not be the break -even point the company as whole?
When the break-even point is assumed on an aggregate or average variable cost. This would not show actual product standing , hence cannot help on doing projections and decisions on a per product basis.