Bill French Analysis

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BILL FRENCH CASE 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…show more content…
What can the company afford to invest for additional “C” capacity? Answer: Break even analysis can be used to decide whether to alter the existing product emphasis or not. For example in this case, if we refer last year’s data, we can see that the product C is not economically feasible to manufacture at $2.40 / unit. Following table gives the analysis for checking whether the company can afford to invest in additional “C” capacity. Total number of units produced 950000 Sale price $4.8 Sale revenues $4560000 Variable cost $1.50 Total variable cost $1425000 Contribution $3135000 Fixed cost $1170000 Investment the company can afford $1965000 Question 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 break-even volume? Answer: Aggregate “A” “B” “C” Sales at full capacity (units) 2000000 Actual Sales Volume (units) 1500000 600000 400000 500000 Unit Sales Price $7.2 $10 $9 $2.4 Sales Revenue $10800000 $6000000 $3600000 $1200000 Variable Cost per unit $4.5 $7.5 $3.75 $1.5 Contribution margin per unit $2.7 $2.5 $5.25 $0.9 Total Variable Costs $6750000 $4500000 $1500000 $750000 Fixed Costs $2970000 $960000 $1560000 $450000 Profit $1080000 $540000 $540000 0 Ratios: Variable cost
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