Mini Case: Multi-Level Break-Even & Revenue Target Setting
A2Z consumer products, an MNC consumer products company has recently set up operations in
India with headquarters in Mumbai. The company has divided its Indian operations into 3 regions.
The company produces three different product categories, and each regional head has been
provided some flexibility in local procurement and marketing. The following are the income
statements of each region for the first year of business.
Region 1
Sales Revenue
(-) COGS
(-) Sales Commission
Contribution
(-) Region Fixed Costs
Region Profit
Region 2
Sales Revenue
(-) COGS
(-) Sales Commission
Contribution
(-) Region Fixed Costs
Region Profit
Region 3
Sales Revenue
(-) COGS
(-) Sales Commission
Contribution
(-) Region Fixed Costs
Region Profit
A
Product Categories
B
C
Total
750,000
300,000
37,500
412,500
1,750,000
962,500
87,500
700,000
1,000,000
600,000
50,000
350,000
3,500,000
1,862,500
175,000
1,462,500
562,500
900,000
1,000,000
400,000
50,000
550,000
2,000,000
1,100,000
100,000
800,000
1,000,000
600,000
50,000
350,000
4,000,000
2,100,000
200,000
1,700,000
600,000
1,100,000
1,750,000
700,000
87,500
962,500
1,750,000
962,500
87,500
700,000
1,500,000
900,000
75,000
525,000
5,000,000
2,562,500
250,000
2,187,500
787,500
1,400,000
In addition to the above, the head office incurs an annual overhead of Rs.9,00,000. The head of
the Indian operations would like to know the following information:
o
o
o
Break-Even Revenues Region-wise and Product-wise on a standalone basis
Break-Even Revenues Region-wise and Product-wise on an overall basis
Revenue Targets Region-wise and Product-wise to achieve an overall profit-growth of 40%
for the coming financial year
For the above analysis, you may assume that the cost structure and pricing would remain
unchanged during the coming financial year.
Page 1 of 5
Page 2 of 5
Page 3 of 5
Page 4 of 5
The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and
a racing bike. Data on sales and expenses for the most recent quarter are given below
Item
Total
Dirt Bikes
Mountain Bikes
Racing Bikes
Sales
300,000
90,000
150,000
60,000
Variable Manufacturing &
Selling Expenses
120,000
27,000
60,000
33,000
Contribution
180,000
63,000
90,000
27,000
Advertising
30,000
10,000
14,000
6,000
Depreciation of special
equipment
23,000
6,000
9,000
8,000
Salaries of product-line
managers
35,000
12,000
13,000
10,000
Allocated Common Fixed Costs
60,000
18,000
30,000
12,000
Total Fixed Costs
148,000
46,000
66,000
36,000
Net Operating Income (Loss)
32,000
17,000
24,000
(9,000)
Fixed Costs
Management is concerned about the continued losses shown by the racing bikes and wants a
recommendation as to whether or not the line should be discontinued. The special equipment
used to produce racing bikes has no resale value and does not wear out. The Product Line
Manager will be absorbed in the other product segments. Advertising is done on a productspecific basis.
Required:
1. Should production and sale of the racing bikes be discontinued? Explain. Show computations
to support your answer.
2. Recast the above data in a format that would be more usable to management in assessing the
long-run profitability of the various product lines.
Page 5 of 5