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Case Study Analysis :Bill French

Based on Break Even Point

Presented By:-Himanshu Arya (501504014)Tanisha Sharda (401207028)Rajat Batra (501504028)Avni Sharma (501504016)Gurbaaj Randhawa (501504027)

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Introduction

• Bill French was a Staff Accountant in Duo-Products Group.• He used to report directly to his boss, Wes Davidson(Controller).• He wanted to do use Break-even analysis for the planning procedures,

which was first of its kind for the Duo-Products Group.• Basically what French had done was to determine the level at which the

company must operate in order to break even.• As he put it,

1. The company must be able at least to sell a sufficient volume of goods so that it will cover all the variable costs of producing and selling the goods.

2. Further, it will not make a profit unless it covers the fixed costs as well.

3. The level of operation at which total costs are just covered is the break-even volume.

4. This should be the lower limit in the planning.

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Accounting Records

• The accounting records had provided the following information that French used in constructing his chart:1. Plant Capacity-2 million units per year.2. Past year’s level of operations- 1.5 million units.3. Average unit selling price- $7.20.4. Total fixed costs- $2,970,000.5. Average unit variable costs- $4.50.

• From the above information, French observed that 1. Each unit contributed $2.70 to fixed costs after covering its variable costs.2. For break even, unit sold must be 1,100,000.3. As variable costs per unit is 62.5% of the selling price, French reasoned

that 37.5% of sales left to cover fixed costs.4. Thus, fixed costs of $2,970,000 required sales of $7,920,000 in order to

break even.

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Break-Even Chart

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Assumptions

• French has had to assume that the variability of the variable costs is constant.

• Similarly, there is an assumption that the fixed costs are truly fixed over the fully range of operations.

• That there is just one break-even point for the firm (by taking the average of the 3 products).

• That the sales mix will remain constant.• There is considerable reliance in French’s analysis that sales price

will remain constant.

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• Report on each product line’s costs for the last year .

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Consideration for the revision

• Volume of product A reduced by 2/3rd.

• Volume of product C increased by 2,00,000 + quarter million units(2,50,000)=4,50,000.

• Selling price of product C is doubled.

• Variable cost of each product line is increased by 10% from the previous year.

• Fixed cost is increased by 7,20,000(60k per month).

• Tax charge at the rate of 50%.

• Dividend budgeted at 4,50,000.

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Product class cost analysis after revision

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Whether to alter existing product mix or not?• According to French, it should not be altered because

alteration causes the Break-even Quantity to rise in the next year due to which will be less profitable and leads to more losses.

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Why is the sum of the three volumes(A+B+C) not equal to the 1,100,000 unit’s aggregate break-even volume?• Contribution of each product is different ,therefore,

sum of all three is not equal to 1,100,000.

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Is this type of analysis of any value? For what can it be used?• The break-even analysis helps understand and

formulate the relationship between costs(Fixed and Variable), output and profit.

• The technique can be used to set sales targets and prices to generate target profits.

• In a wide product range, the analysis helps to find out which products are performing well and which are leading to losses.

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Thank You