Bill French Case Analysis

BILL FRENCH CASE

Submitted By: Pratichi Sharan Section B

Question 1: 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:

• He has assumed that there is just one breakeven point for the firm (by taking the average of the 3 products)

• He has also assumed that the sales mix will remain constant

• He has also assumed that the sales mix will remain constant. Total revenue and total expenses behave in a linear manner over the relevant range

• Since the capacity is being expanded to increase production of Product C, it could be assumed that this increase should be allocated to this product. Production of Product A is to be scaled down, but its level of fixed costs has been assumed to be unchanged

Question 2: On the basis of French's revised information, what does next year look like?

a. What is the break-even point?

Calculation of the break even points using the new estimates:

Breakeven points have been calculated using the formulae:

Breakeven number of units = Fixed costs / Contribution margin per unit

Where

Contribution margin per unit = Selling price – Variable cost per unit

Aggregate "A" "B" "C"

Sales at full capacity (units) 2000000

Sales Volume (units) 1750000 400000 400000 950000

Unit Sales Price $6.948 $10 $9 $4.8

Sales Revenue $12160000 $4000000 $3600000 $4560000

Variable Cost per unit $3.385 $7.5 $3.75 $1.5

Contribution margin per unit $3.56 $2.5 $5.25 $3.3

Total Variable Costs $5925000 $3000000 $1500000 $1425000

Fixed Costs $3690000 $960000 $1560000 $1170000

Profit $2545000 $40000 $540000 $1965000

Ratios:

Variable cost to sales 0.4871906 0.75 0.416667 0.3125

Unit contribution to sales 0.5128094 0.25 0.583333 0.6875

Utilization