Question: I.

Synthesis/Background of the Case Bill

French was hired as staff accountant six months ago by
D...

I. Synthesis/Background of the Case

Bill French was hired as staff accountant six months ago by Duo-Products Corporation. He
reports directly to the controller, Wess Davidson and performs routine type of analytical work.
Duo-Products Corporation is a manufacturing company that produced three products (Products
“A”, “B” & “C”). At present, bulk of its sales or revenues came from Product “A” or about 53% of
the total sales.
Mr. French is a graduate at business school and is considered by his peers to be quite capable
and conscientious. He was well aware of his capabilities and took advantage of every opportunity
that arose to try to educate those around him.
Mr. French was invited by Mr. Davidson to the manager’s meeting and asked him to present his
break-even analysis that the company has not been making use of in its past planning
procedures. He presented his break-even analysis in Table 1:

Plant Capacity 2,000,000 units per year

Past year’s level of operation 1,500,000 units

Average unit selling price $7.2

Total fixed costs $2,970,000

Average unit variable cost $4.5

Unit contribution margin to fixed costs $2.7

Required number of units 1,100,000 units

and sales to break-even $7,920,000

Table 1
Mr.French’s break-even analysis on the product cost analysis of the actual year is presented in
Table 2:

Particulars Aggregate Products

"A" "B" "C"

Sales at 100% Utilization of 2,000,000

capacity (units)

Sales Volume (units) 1,500,000 600,000 400,000 500,000

Unit Sales Price $7.20 $10.00 $9.00 $2.40

 Particulars Aggregate Products

"A" "B" "C"

Sales or Revenues $10,800,000.00 $6,000,000.00 $3,600,000.00 $1,200,000.00

Variable Cost per unit $4.50 $7.50 $3.75 $1.50

Contribution margin per unit $2.70 $2.50 $5.25 $0.90

Total Variable Costs $6,750,000.00 $4,500,000.00 $1,500,000.00 $750,000.00

Fixed Costs $2,970,000.00 $960,000.00 $1,560,000.00 $450,000.00

Profit $1,080,000.00 $540,000.00 $540,000.00 -

Ratios:

Contribution to total sales 100% 56% 33% 11%

Contribution margin ratio 63% 42% 58% 69%

Variable cost to sales 63% 75% 42% 63%

Unit contribution to sales 38% 25% 58% 38%

Utilization of capacity 75% 30% 20% 25%

Break Even Point (units) 1,100,000

Breakeven point in sales 7,920,000

Table 2
During the meeting, participants pointed out several limitations of the break-even analysis of Mr.
French due to failure to consider unit sales increase, use of individual product line analysis,
change in product mix, price increase in “C” line products, manufacturing cost increase, taxes,
dividends, union demand and product emphasis. The manager’s intervention provided new sets
of information that needs to be considered as indicated in Table 3:

Participants of Manager’s New information provided

Meeting

John Cooper – 20% increase in unit sales

Production Control
90% push in capacity
Ray Bradshaw – Assistant Sales Manager
“A” line is losing. Only 2/3 will hold
“B” is constant
· “C” line increase by .25 million
 Fred Williams – Increase in fixed cost to $60,000/month
Manufacturing

Arnie Winetki – General · half a million unit on “C” for next year is on the basis of
Sales Manager doubling the price with no change in cost
· Raise price for two reasons: 1) current price is inconsistent
and out-of-line with the company reputation for quality, 2) no
increase will result in 500,000 units of unmet demands

Anne Fraser – On Net Profit:

Administrative Assistant
Half of last year’s profit went to taxes, $300,000 as dividends
to President
50% increase in dividend for anniversary year and $150,000 retained
earnings or $600,000 after tax-profit
On union demands (Fixed costs):
Meet the union demand of 10% increase across the board without
eroding bonus dividend and net profit
On product emphasis:
Since “A” line is weak, grab the big demand for “C” by shifting some of
the assets from “A” to “C.”

Table 3
Once this set information is considered, change in the method of analysis and break-even levels
has to be modified. This also requires shift in the assumptions from which the analysis was
based.
II. Statement of the Problem
Define the best alternative courses of action (choose 1) and state the reason why and how will
you do it (section vi).
III. Statement of the Objectives
In providing answers to the case problem, this analysis will pursue the following objectives:
· Identify the assumptions that limit Mr. French’s break-even analysis
· Integrate relevant management issues and problems in the analysis
· Determine the optimal balance and level of operations that maximize the value of the
company enables it to achieve its yearly revenue target
IV. Point of View
The case analysis adopts the point of view of Mr. Bill French’s Senior Manager, Mr. Wess
Davidson.
V. Conceptual Framework and Areas of Consideration
Assumptions of the Break-even Analysis
Judgements are oftentimes based on assumptions. Mr. French’s break-even analysis was made
based on his assessment of the limited information that was available to him within the time limit
of his work. This concern to specify assumption was raised by Mr. French’s senior manager and
is specified in the following question in the case that we adopt to guide our analysis: What are
the assumptions implicit in Bill French’s determination of his company’s break-even point?
The following assumptions are implicit in Bill French’s determination:
There is a single breakeven point for the whole company by taking the average of the 3 products
The products mix will not be modified by the management team
Total revenues and total expenses behave in a linear manner within a relevant range
There are no changes and issues in business processes and operations (through lack of
information on management problems, issues and concerns)
The increase in the capacity will be allocated to product “C” which was due to increase
production.
Production of Product “A” is to be scaled down, but its level of fixed costs will remain unchanged
During manager’s meeting, new information came out reflecting the issues, concerns and
problems management team are facing that unfortunately are not considered and integrated in
Mr. French’s analysis and runs contrary to analysis held assumptions. As a result, the base year
of Mr. French’s analysis is incomplete and limited, and new information must be integrated in his
analysis as presented in Table 4:

New information provided Normal/Base Projection/Changes

Year

John Cooper – Production Control 1,500,000 1,750,000

· 20% increase in unit sales 2,000,000 400,000
· 90% push in capacity 600,000 400,000
Ray Bradshaw – Assistant Sales Manager 400,000 750,000
· “A” line is losing. Only 2/3 will hold 500,000
· “B” is constant
· “C” line increase by .25 million

Fred Williams – Manufacturing 2,970,000 3,690,000

Increase in fixed cost to $60,000/month

Arnie Winetki – General Sales Manager 2.40 4.80

· half a million unit on “C” for next year is on the basis
of doubling the price with no change in cost
· Raise price for two reasons: 1) current price is
inconsistent and out-of-line with the company reputation
for the quality of the product produced, 2) no increase will
result in 500,000 units of unmet demands

Anne Fraser – Admin. Asst. to President $1,080,000 > 1,305,000

On Net Profit: 2,970,000 3,690,000
Half of last year’s profit went to taxes, $300,000 as A: 600,000 + 10% in labor
dividends cost
B: 400,000
50% increase in dividend for anniversary year and 400,000
C: 500,000
$150,000 retained earnings or $600,000 after tax-profit
400,000
On union demands (as fixed cost):
950,000
Meet the union demand of 10% increase across the board
without eroding bonus dividend and net profit
On product emphasis:
Since “A” line is weak, grab the big demand for “C” by
shifting some of the assets from “A” to “C.”
Table 4
Break-even Analysis and the New Information from Management Meeting
The second question (On the basis of French’s revised information, what does next year look
like?) calls for the integration of the new information raised during management meeting. Taking
note of the way this new information shaped the new assumptions for analysis, Table 5 will
present the new break-even analysis for Duo-Products Corporation:

Particulars Aggregate Product

"A" "B" "C"

Sales at 100% Utilization of 2,000,000 2,000,000 2,000,000 2,000,000

capacity (units)

Sales Volume (units) 1,750,000 400,000 400,000 950,000

Unit Sales Price $ 6.95 $ 10.00 $ 9.00 $ 4.80

Sales Revenue $12,160,000.00 $4,000,000.00 $3,600,000.00 $4,560,000.00

Variable Cost per unit $3.39 $7.50 $3.75 $1.50

Total Variable Costs $5,925,000.00 $3,000,000.00 $1,500,000.00 $1,425,000.00

Contribution margin per unit $3.56 $2.50 $5.25 $3.30

Contribution margin $6,230,000.00 $1,000,000.00 $2,100,000.00 $3,135,000.00

Fixed Costs $3,690,000.00 $960,000.00 $1,560,000.00 $1,170,000.00

Profit $2,545,000.00 $40,000.00 $540,000.00 $1,965,000.00

Ratios:

Contribution to total sales 100.00% 32.89% 29.61% 37.50%

Contribution margin ratio 51.23% 25.00% 58.33% 68.75%

Variable cost to sales 48.73% 75.00% 41.67% 31.25%

Unit contribution to sales 51.22% 25.00% 58.33% 68.75%

Utilization of capacity 87.50% 20.00% 20.00% 47.50%

Break Even Point (units) 1,035,686 236,728 236,728 562,229

Breakeven point in sales 7,196,535.69 2,367,281.48 2,130,553.33 2,698,700.88

Table 5
Breakeven point is the point where total revenue equals total cost, that is, a zero profit situation.
There are several ways breakeven point is calculated, namely, breakeven points in units and
breakeven point in the amount of sales. In using these methods, we assume that there are no
common fixed expenses, all fixed costs are direct fixed expenses.
The breakeven point in units is calculated using the formula:
Breakeven number of units = Fixed costs / Contribution margin per unit or
= Fixed costs / Selling price – Variable cost per unit
= $3,690,000 / $3.56
= 1,035, 686 units
The computed break-even number of units in each products is presented below:

Product Percentage to Total Units Break-even points in Units

" A" 22.86% 236,728

" B" 22.86% 236,728

" C" 54.29% 562,229

Total 100.00% 1,035,686

Another break-even point analysis method for companies with multiple product line is to use the
contribution margin ratio (CMR) approach. This approach allows the company to estimate break-
even salesbased on the estimate of the weighted average CMR for all its products.
The CMR is computed as follows: CMR = (unit price-unit variable cost)/price or
CMR = contribution margin/price
The weighted average (WA) CMR is computed in the following manner:
WA CMR = % of T Sales x CMR “A” + % of T Sales x CMR “B” + % of T Sales x CMR “C”
= [ (32.89%) x (25.00%)] + [(29.61%) x (58.33%)] + [ (37.50%) x (68.75%)]
=8.22% +17.27% +25.78%
= 51.27%
The breakeven point in sales is calculated using WA CMR as follows:
Break-even point in sales = Total fixed cost/WA CMR
= $3,690,000/51.27%
= 7,196,535.69
The computed
This means that for Duo-Production Company to break even, 7,196,535.69 of all three products
must be sold proportionately. The break-even units and sales for each product are as follows:

Product Aggregate breakeven sales ($) % of total sales Product break-even sales ($)

A 7,687,500 .33 2,536,875

B .30 2,306,250

C .37 2,844,375

Updated Revenue Target based on a Specified Profit Level

Aside from the determination of the break-even point, Cost-Volume-Profit analysis is a useful tool
for decision makers to assist them in determining the revenue required to achieve the
organization’s desired profit level.
In the management meeting, the Administrative assistant to the President pointed out the current
year’s target to increase dividend to 50% while maintaining the retained earnings level at
$150,000 or achieved a profit after taxes of $600,000. In addition, the union also demands a 10%
increase across the board. Given all these specified revenue level and increase in fixed costs, a
new revenue target has to be determined.
To calculate this updated revenue target, we employ the following formula:
Q (Sales Volume units) = Fixed cost + Profit level / unit price – variable unit cost
= Fixed cost + profit level / contribution margin
= 3,690,000 (excl. Wage increase) + 600,000 / 7.2-4.5
= 4,290,000 / 2.7 = 1,588,888 units
In monetary value, the sales volume amount is determined by multiplying the Sales volume
target by the Units sales price:
Sales volume value = Unit sales price x Sales Volume
= $7.2 x 1,588,888.88 units
= $11,440,000

VI. Alternative Courses of Action

Forecast profits of the Company as discussed during the meeting

Advantage Disadvantage

Increase the selling price per unit of Products “A” & “B” to meet the target profit of the Company.

Advantage Disadvantage

The Company will generate profit Company’s clients might switch to another company that sells the
same products but with a lower price
Sales increases as the price of the
produced products

100% utilization of the Company’s plant capacity

Advantage Disadvantage

Successful products produced Increase in fixed costs

Increasing demand of the products manufactured

Increase the production of products “A” , “B”and “C”.

Advantage Disadvantage

Increase in production may increase The Company may have to add more staff or production
sales or revenues of the Company which equipment which will result to increase in fixed costs of the
will result also to increase in target Company.
profits.
 The company may have to lower selling price, or offer
volume discounts, or use pricing tiers for different order
sizes. As a result, not all products produced will not have the
same price

VII. Recommendation and Implementation.

No answer yet :-(
VIII. Learning Points
Breakeven point analysis provides a convenient and informative tool in performance evaluation
and control. However, there are indirect cost or common fixed expenses that are arbitrarily
allocated to a product such as interest expense, senior management salaries and compensation.
This will not invalidate the analysis but less accurate.