Case 16-3 Bill French

725 Words Nov 15th, 2011 3 Pages
Case 16 – 3
Bill French
Questions
1. What are the assumptions implicit in Bill French’s determination of his company’s break-even point?

* 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. 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.

2. On the basis of French’s revised information, what does next
…show more content…
The company can afford to invest more fixed costs and variable costs (shifting assets from “A” to “C”) for additional “C” capacity thereby maximizing capacity utilization. 4. Calculate each of the three product’s break-even points using the data in Exhibit 3. Why is the sum of these three volumes not equal to the 1,100,000 units aggregate break-even volume?

Product “A”: Break-even Units = FC/(Unit Sales Price – Variable cost per unit) = 960,000/(10 – 7.50) = 384,000 Units

Product “B”: Break-even Units = FC/(Unit Sales Price – Variable cost per unit) = 1,560,000/(9 – 3.75) = 297,143 Units

Product “C”: Break-even Units = FC/(Unit Sales Price – Variable cost per unit) = 450,000/(2.40 – 1.50) = 500,000 Units

Total = 384,000 + 297,143 + 500,000 = 1,181,143

Because each product has a different contribution margin percentage, the volume required for each break-even point would be different and will not add up to the company’s overall break-even volume of 1,100,000 units; the overall break-even volume assumes that there is only one contribution margin percentage which is :
Unit sales price = $7.20 [(10 + 9 + 2.4)/3] 100.00%
Variable cost/unit = 4.50 [(7.5 + 3.75 +…

More about Case 16-3 Bill French