BILL FRENCH ACCOUNTANT

Case Study

Question 1: What are the assumptions implicit in Bill Frenchs determination of his companys breakeven 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 3 products)
He has also assumed that the sales mix will remain constant
He has also assumed that the sales mix will remain constant. Total revenue and total
expenses behave in a linear manner over the relevant range
Since the capacity is being expanded to increase production of Product C, it could be
assumed that this increase should be allocated to this product. Production of Product A
is to be scaled down, but its level of fixed costs has been assumed to be unchanged

Question 2: On the basis of Frenchs revised information, what does next year look
like?
a. What is the break-even point?
Calculation of the break even points using the new estimates: Breakeven points have been
calculated using the formulae:
Breakeven number of units= Fixed costs / Contribution margin per unit
Where
Contribution margin per unit
= Selling price Variable cost per unit

Sales volume (units)

Unit selling price
Sales Revenue
Variable Cost per unit
Total variable cost
Fixed cost
Breakeven volume (units)

Aggregate
1750000
1.16
2028000
0.61
1065000
640000
1163636

A
400000
1.67
668000
1.25
500000
209230
498167

B
400000
1.5
600000
0.625
375000
338461
386813

C
950000
0.8
760000
0.25
190000
92307
167831

The break even unit for the aggregate production is 1163636 units.

b. What level of operations must be achieved to pay the extradividend,

ignoring union demands?

Sales volume (units)

Unit selling price
Sales Revenue
Variable Cost per unit
Total variable cost
Fixed cost
Dividends
Profit for business
Tax

Aggregate
1750000
1.16
2028000
0.61
1065000
640000
75000
25000
100000

Breakeven volume (units)

1527273

c. What level of operations must be achieved to meet union demands,

ignoring bonus dividends?

Sales volume (units)

Unit selling price
Sales Revenue
Variable Cost per unit
Total variable cost
Fixed cost
Dividends
Profit for business
Tax
Breakeven volume (units)

Aggregate
1750000
1.16
2028000
0.671
1065000
640000
50000
25000
750000
1615542

d. What level of operations must be achieved to meet union demands,

ignoring bonus dividends?

Sales volume (units)

Unit selling price
Sales Revenue
Variable Cost per unit
Total variable cost
Fixed cost
Dividends
Profit for business
Tax
Breakeven volume (units)

Aggregate
1750000
1.16
2028000
0.671
1065000
640000
50000
25000
750000
1719971

Question 3: Can the break-even analysis help the company decide whether to alter the
existing product emphasis? What can the company afford to invest for additional C
capacity?
At different activity levels, the interaction of volume, selling price, variable costs and
fixed costs, the relevant variables and their impact upon profi t are considered
simultaneously in break-even analysis. Therefore the break -even analysis can help the
company decide whether to alter the existing product emphasis because it will allow the
company to identify which product generates the highest profit.
From previous years data of sales revenue we infer that at $0.4 cost per unit of
production, there is a no profit no loss situation.
The below table shows how much we can invest for additional C capacity

Sales volume (units)

Unit selling price
Sales Revenue
Variable Cost per unit
Total variable cost
Contribution
Fixed cost
Investment the company can
afford to make in C

C
950000
0.8
760000
0.25
190000
570000
92307
477693

Question 5: Is this type of analysis of any value? For what can it be used?

The following are the benefits of the break even analysis: The break even analysis helps
understand and formulate the relationship between costs (fixed and variable), output and
profit. The technique can be used to set sales targets and/or prices to generate target profits. In
a wide product range, the analysis helps to find out which products are performing well and
which are leading to losses .It is also versatile enough to include items like donations, wage
increases, etc. that directly or indirectly affect costs