MBA 204 030
BILL FRENCH, ACCOUNTANT
Bill French picked up the phone and called his boss, Wes Davidson, controller of Duo- Products Corporation. “Say, Wes, I’m all set for the meeting this afternoon. I’ve put together a set of break –even statement that should really make the boys sit up and take notice- and I think they’ll be able to understand them, too.” After a brief conversation about other matters, the call was concluded and French turned to his charts for one last check-out before the meeting.
French had been hired six months earlier as a staff accountant. He was directly responsible to Davidson and, up to the time of this case, had ...view middle of the document...
The level of operation at which total costs (that is, variable plus nonvariable) are just covered is the break-even volume. This should be the lower limit in all of our planning.”
The accounting records had provided the following information which French used in constructing his chart:
Plan capacity – 2,000,000 units
Past year’s level of operation – 1,500,000 units
Average unit selling price - $ 1.20
Total fixed costs - $ 520,000
Average variable unit cost - &0.75
From this information, he observed that each unit contributed & 0.45 to fixed overhead after covering the variable costs. Given total fixed costs of $520,000, he calculated that 1,155,556 units must be sold in order to break even. He verified this conclusion by calculating the dollar sales volume that was required to break even. Since the variable costs per unit were 62.5% of the selling price, French reasoned that 37.5% of every sales dollar was left available to cover fixed costs. Thus, fixed costs of % 520,000 require sales of $ 1,386,667 in order to break even.
When he constructed a break-even chart to present the information graphically, his conclusions were further verified. The chart also made it clear that the firm was operating at a fair margin over the break-even requirements, and that the profits accruing (at the rate of 47 % of every sales dollar over break-even) increased rapidly as volume increased (see Exhibit 1).
Shortly after lunch, French and Davidson left for the meeting. Several representatives of the manufacturing departments were present, as well as the general sales manager, two assistant sales managers, the purchasing officer, and two men from the product engineering office. Davidson introduced French to the few men that he had not already met and then the meeting got under way. French’s presentation was the last item on Davidson’s agenda, and in due time the controller introduced French, explaining his interest in cost control and analysis.
French had prepared enough copies of his chart and supporting calculations so that they could be distributed to everyone at the meeting. He described carefully what he had done and explained how the chart pointed to a profitable year, dependent on meeting the volume of sales activity that had been maintained in the past. It soon became apparent that some of the participants had known in advance what French planned to discuss; they had come prepared to challenge him and soon had taken control of the meeting. The following exchange ensued:
COOPER (production control): You know, Bill, I’m really concerned that you haven’t allowed for our planned changes in volume next year. It seems to me that you should have allowed for the sales department’s guess that we’ll boost sales by 20 %, unitwise. We’ll be pushing 90% of what...