Bill French
1. What are the assumptions implicit in Bill French's determination of his company's breakeven point?
Bill has the following 3 assumptions:
1. One breakeven point for company and whole products
2. constant product mix
3. no change on fixed costs for the next year if production rate is changes.
2. On the basis of French's revised information, what does next year look like?
Sales Volume
Unit Sales Price
Sales Revenue
Total Variable Cost
Contribution Margin
Total Variable Cost
Fixed Costs
Aggregate
1,750,000
6.95
12,160,000
3.39
3.56
5,925,000
3,690,000
A
400,000
10
4,000,000
7.50
2.50
3,000,000
960,000
B
400,000
9
3,600,000
3.75
5.25
1,500,000
1,560,000
C
950,000
4.80
4,560,000
1.50
3.30
1,425,000
1,170,000
a. What is the break-even point?
Contribution margin per unit = Selling price – Variable cost per unit
Contribution margin per unit = 6.95-3.39
Contribution margin per unit = 3.56
Breakeven number of units = Fixed costs / Contribution margin per unit
Breakeven number of units = 3,690,000 / 3.56
Breakeven number of units = 1,036,516
b. What level of operations must be achieved to pay the extra dividend, ignoring union
demands?
Operating Income After Taxes
Unit Sales Price
Unit Variable Cost
Unit Contribution Margin
Operating Income before taxes
Fixed Costs
600,000
6.95
3.39
3.56
1,200,000
3,690,000
Number of units = ( Fixed Cost + Operating Income ) / Contribution
Number of units = 4,890,000 / 3.56 = 1,373,595
c. What level of operations must be achieved to meet union demands, ignoring bonus
dividends?
Operating Income after taxes
Unit Sales Price
Unit Variable Cost
Unit Contribution Margin
Operating Income before taxes
Fixed Costs
Total
450,000
6.95
3.73
3.22
900,000
3,690,000
4,590,000
Number of units = 4,590,000 / 3.22 = 1,434,375
d. What level of operations must be achieved to meet both union demands & bonus
dividends?
Operating Income after taxes
Unit Sales Price
Unit Variable Cost
Unit Contribution Margin
Operating Income before taxes
Fixed Costs
Total
600,000
6.95
3.73
3.22
1,200,000
3,690,000
4,890,000
Number of units = 4,890,000 / 3.22 = 1,528,125
3. Can the breakeven analysis help the company decide whether to alter the existing
product emphasis? What can the company afford to invest for additional “C” capacity?
Breakeven analysis can help the company to decide whether to alter the existing product
emphasis. Company can afford to invest 1,965,000 for C product.
Product C
Sales Volume
950,000
Unit Sales Price
4.80
Unit Sales Revenue
4,560,000
Unit Variable Cost
1.50
Total Variable Cost
1,425,000
Contribution
3,135,000
Fixed Costs
1,170,000
Affordable Investment
1,965,000
4. Calculate each of the three products’ break even points using the data. Why is the sum
of these three volumes not equal to the 1,100,000 unit’s aggregate breakeven volume?
Because each products unit contribution margin differs.
Sales Volume
Unit Sales Price
Sales Revenue
Variable Cost
Contribution Mar.
Total Variable Cost
Fixed Costs
Breakeven Units
Aggregate
1,500,000
7.20
10,800,000
4.50
2.70
6,750,000
2,970,000
1,100,000
A
6000000
10
6,000,000
7.50
2.50
4,500,000
960,000
384,000
B
4000000
9
36000000
3.75
5.25
1,500,000
1,560,000
297,143
C
500,000
2.40
1,200,000
1.50
0.90
750,000
450,000
500,000
5. Is this type of analysis of any value? For what can it be used?
This type of analysis is valuable for deciding product emphasis, unit prices, etc..