Bill French Case Notes

Case 16-3

Case 16-3: Bill French Note: This case is unchanged from the Eleventh Edition. Approach This case requires quite a few calculations, but it is a good case for introducing students to the uses and limitations of break-even analysis. It can be used to discuss many of the hidden assumptions involved in such an approach. Some instructors also find it a good vehicle for discussing some of the human problems arising when a young, well-educated person begins working in a business. Finally, at The University of Michigan we have found it useful to defer this case until Chapter 26, when we teach several cases on linear programming: Bill French can be used as an introductory case to raise the issue of what product mix is optimal given resource and/or sales volume constraints. Comments on Questions Question 1 There is undoubtedly a long list of assumptions that can be related to this, or any, break-even analysis. Part of the problem of dealing with analyses of this sort is that they take on the characteristic of being static even though the form of presentation might lead one to believe that here is a moving, dynamic analysis that allows for a variety of changed conditions. To an extent this is true; but there are many conditions that are assumed to be constant. It is to the assumed constants that the students must ultimately direct their attention. For instance: 1. French has had to assume that the variability of the variable costs is constant. French has thus assumed a relatively constant level of efficiency for machines and direct labor over all portions of the range of operations. Whether or not this is a valid assumption in a practical sense is highly questionable. 2. Similarly, there is an assumption that the fixed costs are truly fixed over the full range of operations that has been pictured. In fact, some fixed costs are likely to be step functions over this range. 3. The calculation of a break-even point based on sales assumes that there will be a reasonably constant relationship between the production and the sales pattern. Were this not the case, the spread between the patterns would lead to an incurrence of costs to be carried in inventory, and the full contribution suggested by the chart may not be realized. 4. Along somewhat the same vein, the assumption (and a basic one in either aggregate or product-line analyses) that the sales mix will remain constant is a crucial one. 5. And, obviously, there is considerable reliance in French's analysis that sales prices will remain constant. Considering the objections of the participants at the meeting, it is easy to see where French's failure to make explicit his assumptions got him into the position of appearing to be a naive, inexperienced "whiz kid." Question 2 Calculation of various break-even points:

1

Situation #1:

Allowing for 10 percent increase in