Xavier University- Ateneo de Cagayan

Cagayan de Oro City

School of Business Management
Masters in Business Administration Program

In Partial Fulfillment
Of The Requirements For
MBA 112B (Managerial Accounting)

Submitted by:
Judith C. Polestico
Hershe B. Jabines
Hobaib A. Saiben

Submitted to:
Mr. Hurel Dave Ensencio
Background of the Case
Mr. 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 of 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.
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.

1. What are the assumptions implicit in Bill French’s determination of his company’s
break-even?
a. He assumed that there is single breakeven point for the whole company and whole
products.
b. He assumed that the sales mix will remain constant. Total revenue and total expenses
behave in a linear manner within a relevant range
c. The increase in the capacity will be allocated to product “C” since there is a plan to
increase production.
d. Production of Product “A” is to be scaled down, but its level of fixed costs will remain
unchanged.
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
Sales Revenue 12,160,000 4,000,000 3,600,000 4,560,000
Total Variable Cost 3.39 7.50 3.75 1.50
Contribution Margin 3.56 2.50 5.25 3.30
Total Variable Cost 5,925,000 3,000,000 1,500,000 1,425,000
Fixed Costs 3,690,000 960,000 1,560,000 1,170,000
 a. What is the break-even point?
Breakeven number of units = Fixed costs / Contribution margin per unit or
= Fixed costs / Selling price – Variable cost per unit
= $3,690,000 /$6.95-$3.39
= $3,690,000 / $3.56
= 1,036,516 units
b. What level of operations must be achieved to pay the extra dividend, ignoring union
demands?
To pay the extra dividend of 50% and to retain a profit of $1,500,000.00, we need to
have a profit after taxes of $600,000.00. As half of the revenues go to the government as
taxes, the total revenues before tax deduction should be $1,200,000.00.

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
Number of units =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
Number of Units= 1,434,375
 d. What level of operations must be achieved to meet both union demands & bonus
dividends?

Operating Income after taxes $600,000

Unit Sales Price $6.95
Unit Variable Cost $3.73
Unit Contribution Margin $3.22
Operating Income before taxes $1,200,000
Fixed Costs $3,690,000
Total $4,890,000

Number of units = 4,890,000 / 3.22

Number of units = 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?

Product C
Total Number of Units Produced 950,000
Unit Sales Price $4.80
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
Breakeven analysis can be used to decide whether to alter the existing product
emphasis or not. For example, in this case, if we refer to last year’s data, we can see that it is
not economically feasible to manufacture Product C as $2.40 per unit.
The table above gives the analysis for checking whether the company can afford to
invest in additional “C” capacity.
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?

Aggregate A B C
Sales Volume 1,500,000 600,000 400,000 500,000
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?

A very effective tool in the hands of management is breakeven analysis. Breakeven

point analysis provides a convenient and informative tool in performance evaluation and
control. It can help understand and formulate the relationship between fixed and variable
costs. It can be used to show the level of profit at a given level of output, and to set targets for
achieving profits. In a wide product range, the analysis helps to find out which products are
performing well and which are leading to losses.