Case Study Analysis :
Bill French
Based on Break Even Point
Presented By:-
Pranav Kakkar (401703019)
Sidhant Goyal (401703028)
MD Shagil (401703015)
Manan (401703014)
Introduction
• Bill French was a Staff Accountant in Duo-Products Group.
• He used to report directly to his boss, Wes Davidson(Controller).
• He wanted to do use Break-even analysis for the planning procedures,
which was first of its kind for the Duo-Products Group.
• Basically what French had done was to determine the level at which the
company must operate in order to break even.
• As he put it,
1. The company must be able at least to sell a sufficient volume of goods
so that it will cover all the variable costs of producing and selling the
goods.
2. Further, it will not make a profit unless it covers the fixed costs as well.
3. The level of operation at which total costs are just covered is the break-
even volume.
4. This should be the lower limit in the planning.
Accounting Records
• The accounting records had provided the following information that
French used in constructing his chart:
1. Plant Capacity-2 million units per year.
2. Past year’s level of operations- 1.5 million units.
3. Average unit selling price- $7.20.
4. Total fixed costs- $2,970,000.
5. Average unit variable costs- $4.50.
• From the above information, French observed that
1. Each unit contributed $2.70 to fixed costs after covering its variable costs.
2. For break even, unit sold must be 1,100,000.
3. As variable costs per unit is 62.5% of the selling price, French reasoned
that 37.5% of sales left to cover fixed costs.
4. Thus, fixed costs of $2,970,000 required sales of $7,920,000 in order to
break even.
Break-Even Chart
Assumptions
• French has had to assume that the variability of the variable costs
is constant.
• Similarly, there is an assumption that the fixed costs are truly fixed
over the fully range of operations.
• That there is just one break-even point for the firm (by taking the
average of the 3 products).
• That the sales mix will remain constant.
• There is considerable reliance in French’s analysis that sales price
will remain constant.
• Report on each product line’s costs for the last
year .
Consideration for the revision
• Volume of product A reduced by 2/3rd.
• Volume of product C increased by 2,00,000 + quarter million
units(2,50,000)=4,50,000.
• Selling price of product C is doubled.
• Variable cost of each product line is increased by 10% from the
previous year.
• Fixed cost is increased by 7,20,000(60k per month).
• Tax charge at the rate of 50%.
• Dividend budgeted at 4,50,000.
Product class cost analysis after
revision
Whether to alter existing product mix or not?
• According to French, it should not be altered because
alteration causes the Break-even Quantity to rise in the
next year due to which will be less profitable and leads
to more losses.
Why is the sum of the three volumes(A+B+C) not
equal to the 1,100,000 unit’s aggregate break-even
volume?
• Contribution of each product is different ,therefore,
sum of all three is not equal to 1,100,000.
Is this type of analysis of any value? For what can it be
used?
• The break-even analysis helps understand and
formulate the relationship between costs(Fixed and
Variable), output and profit.
• The technique can be used to set sales targets and
prices to generate target profits.
• In a wide product range, the analysis helps to find out
which products are performing well and which are
leading to losses.
