I. BACKGROUND AND ISSUES
Bill French was staff accountant of Duo-Products Corporation. He was reporting to Wes Davidson and had been doing routine types of analytical work. In an informal manager’s meeting, Davidson invited Bill French to attend. French choose to present break-even data to determine the level at which the company must operate in order to break-even. During the meeting, French was challenged and questioned because his presentation failed to consider some aspects of the company’s operation such plans for expansion in sales and production, the product mix and prices on individual product basis since he was only using “averaging”. This is because of his ...view middle of the document...
Utilize 90 percent of plant capacity
5. The proper computation for profitable product mix
6. The proposed increase in price of product “C”
7. Taxes, dividends, union demands and product emphasis
V. ALTERNATIVE COURSES OF ACTION
1. Use Cost-volume-profit analysis in decision making.
It is easy to understand. Mostly applicable only to business with single product
It is easy to determine the sales amount—in either unit or revenue terms—that is required to cover total costs (both fixed and variable).
2. Determine the level of the company must operate in order to breakeven.
Measure profit and loss at different levels of production and sales. Assumes production and sales are
Predict the effect of changes in price of sales Time consuming to prepare.
VI. CONCLUSION AND RECCOMMENDATION
Break-even analysis especially by using profitgraphs or CVP analysis can help us understand the relationship between revenue and cost. However, it will only apply to business with single product. In a business with several products, it will only be applicable if each product has approximately the same contribution margin percentage.
If the business produces several products and they have different contribution margin percentages, weighted-average unit contribution for all products rather than the individual unit contribution margin is used as long as the product mix remains constant. Products A, B and C have different contribution margin percentage so simple averaging is not applicable.
If however, the business produces several products and they have different contribution margin percentages, weighted-average unit contribution for all products rather than the individual unit contribution margin as long as the product mix remains constant.
In instance when products have different unit contributions and when the product mix changes, it is applicable to treat each product as a separate entity and this require that all cost of the business be allocated to individual products. The break-even point on such is a the volume at which the total contribution of that product recovers that product’s equitable share of the company’s total fixed costs.
VII. ANSWERS TO QUESTIONS
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 of the company’s break-even:
By using the average of the 3 products, he assumed that there is only one break-even point for the firm which is 1,100,000 units.
He assumed that the sales mix will remain constant.
He assumed that total revenue and total expenses behave in a linear manner over the relevant range.
Fixed cost has been assumed to be unchanged.
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...