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Bill French

1. What are the assumptions implicit in Bill French's


determination of his company's break-even 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?
Aggregate A B C
Sales Volume 1,750,000 400,000 400,000 950,000
Unit Sales Price 6.95 10 9 4.80
4,000,00 3,600,00 4,560,00
Sales Revenue 12,160,000 0 0 0
Total Variable Cost 3.39 7.50 3.75 1.50
Contribution Margin 3.56 2.50 5.25 3.30
3,000,00 1,500,00 1,425,00
Total Variable Cost 5,925,000 0 0 0
1,560,00 1,170,00
Fixed Costs 3,690,000 960,000 0 0
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 600,000
Unit Sales Price 6.95
Unit Variable Cost 3.39
Unit Contribution Margin 3.56
Operating Income before
taxes 1,200,000
Fixed Costs 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 450,000
Unit Sales Price 6.95
Unit Variable Cost 3.73
Unit Contribution Margin 3.22
Operating Income before
taxes 900,000
Fixed Costs 3,690,000
Total 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?
600,00
Operating Income after taxes 0
Unit Sales Price 6.95
Unit Variable Cost 3.73
Unit Contribution Margin 3.22
1,200,0
Operating Income before taxes 00
3,690,0
Fixed Costs 00
4,890,0
Total 00
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 units aggregate breakeven volume?
Because each products unit contribution margin differs.

Aggregate A B C
Sales Volume 1,500,000 6000000 4000000 500,000
Unit Sales Price 7.20 10 9 2.40
Sales Revenue 10,800,000 6,000,000 36000000 1,200,000
Variable Cost 4.50 7.50 3.75 1.50
Contribution
Mar. 2.70 2.50 5.25 0.90
Total Variable
Cost 6,750,000 4,500,000 1,500,000 750,000
Fixed Costs 2,970,000 960,000 1,560,000 450,000
Breakeven Units 1,100,000 384,000 297,143 500,000

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..