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Case 16 3 Essay

2734 words - 11 pages

Case 16-3: Bill French Note: This case is unchanged from the Eleventh Edition. Approach This case requires quite a few calculations, but it is a good case for introducing students to the uses and limitations of break-even analysis. It can be used to discuss many of the hidden assumptions involved in such an approach. Some instructors also find it a good vehicle for discussing some of the human problems arising when a young, well-educated person begins working in a business. Finally, at The University of Michigan we have found it useful to defer this case until Chapter 26, when we teach several cases on linear programming: Bill French can be used as an introductory case to raise the issue of ...view middle of the document...

Were this not the case, the spread between the patterns would lead to an incurrence of costs to be carried in inventory, and the full contribution suggested by the chart may not be realized. 4. Along somewhat the same vein, the assumption (and a basic one in either aggregate or product-line analyses) that the sales mix will remain constant is a crucial one. 5. And, obviously, there is considerable reliance in French's analysis that sales prices will remain constant. Considering the objections of the participants at the meeting, it is easy to see where French's failure to make explicit his assumptions got him into the position of appearing to be a naive, inexperienced "whiz kid." Question 2 Calculation of various break-even points:

1

Situation #1:

Allowing for 10 percent increase in variable costs and $60,000 per month increase in fixed costs, but not holding any dividend or retention requirements against operations, a simple break-even calculation (neither profit nor loss) comes out to be: Fixed costs of operating .................................................................................................................................. $3,690,000 Aggregate variable unit income, Chart 1, line 3 minus line 5 ........................................................................ $3.23 Break-even units required, $3,690,000 / $3.23 ................................................................................................ 1,142,000 units Ratio of variable income to sales, V.I. = $3.23; S. P. = $6.95......................................................................... .4647 Break-even dollar volume required, $3,690,000 / 0.4647 ............................................................................... $7,940,000

Situation #2:

No allowance for 10 percent increase in variable costs, no dividend requirement, no earnings retention goal. In short, allow for change in product mix, for increased fixed costs, and change in "C" sales pricethen calculate point of no profit-no loss. Fixed costs of operating................................................................................................................................... $3,690,000 Aggregate unit variable income, Chart A, line 5 ............................................................................................. $3.56 Break-even units required, $3,690,000 / $3.56 ................................................................................................ 1,036,500 units Ratio of variable income to sales, SP. = $6.95, V.I. = $3.56 ........................................................................... .5122 Break-even dollar volume required, $3,690,000 / .5122 ................................................................................. $7,204,000

2

CHART I Aggregate Product ―A‖ Product ―B‖ Product ―C‖ Line Last Yr. Next Yr. Last Yr. Next Yr. Last Yr. Next Yr. Last Yr. Next Yr. Unit Capacity...

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