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    1244 - Roshan Kumar Sahoo - Assignment 2

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    ROSHAN KUMAR SAHOO
    1. Bill French made three assumptions in determining the break-even point for his company: 1) there is one break-even point for the whole company rather than individual products, 2) the product mix will remain constant, and 3) fixed costs will not change if production rates change. 2. Given the revised information, the company needs to produce between 1,035,686 units and 1,528,125 units to break even depending on the variable costs and sales prices of the individual products. 3. A break-even analysis can help the company decide whether to alter its product emphasis, and shows that the company can afford to invest up to $1,965,000 for additional "C"

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    1244 - Roshan Kumar Sahoo - Assignment 2

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    ROSHAN KUMAR SAHOO
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    1. Bill French made three assumptions in determining the break-even point for his company: 1) there is one break-even point for the whole company rather than individual products, 2) the product mix will remain constant, and 3) fixed costs will not change if production rates change. 2. Given the revised information, the company needs to produce between 1,035,686 units and 1,528,125 units to break even depending on the variable costs and sales prices of the individual products. 3. A break-even analysis can help the company decide whether to alter its product emphasis, and shows that the company can afford to invest up to $1,965,000 for additional "C"

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    1. Bill French made three assumptions in determining the break-even point for his company: 1) there is one break-even point for the whole company rather than individual products, 2) the product mix will remain constant, and 3) fixed costs will not change if production rates change. 2. Given the revised information, the company needs to produce between 1,035,686 units and 1,528,125 units to break even depending on the variable costs and sales prices of the individual products. 3. A break-even analysis can help the company decide whether to alter its product emphasis, and shows that the company can afford to invest up to $1,965,000 for additional "C"

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    25 views3 pages

    1244 - Roshan Kumar Sahoo - Assignment 2

    Uploaded by

    ROSHAN KUMAR SAHOO
    1. Bill French made three assumptions in determining the break-even point for his company: 1) there is one break-even point for the whole company rather than individual products, 2) the product mix will remain constant, and 3) fixed costs will not change if production rates change. 2. Given the revised information, the company needs to produce between 1,035,686 units and 1,528,125 units to break even depending on the variable costs and sales prices of the individual products. 3. A break-even analysis can help the company decide whether to alter its product emphasis, and shows that the company can afford to invest up to $1,965,000 for additional "C"

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    of 3

    ROSHAN KUMAR SAHOO REG-PGP/1244/06

    1. What are the assumptions implicit in Bill French's determination of his


    company's break-even point?
    Bill has the following 3 assumptions:

    1.One breakeven point for company and whole products

    2.constant product mix

    3.No change on fixed costs for the next year if production rate changes.

    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. 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 year look like:
    A. Break-even units= Fixed Cost/ (Selling price – Variable Cost Per Unit) Break-even
    units= $3,690,000/ (6.948 - 3.56) = 1,035,686 units
    The breakeven unit for the aggregate production is 1035686 units

    B. To pay the extra dividend of 50% and to retain the profit of $150000 we need to have
    the profit after taxes as $600000. As half of the revenues go to the government as taxes
    therefore the total revenues before tax deduction should be equal to $1200000.

    Operating income after taxes ($450000 dividend + $150000 profits) $600000


    Selling price $6.95
    Variable cost per unit $3.39
    Contribution margin per unit $3.56
    Operating income before tax (assuming 50% of the revenue goes as tax to the
    government) $ 1200000
    Total Fixed Cost $3690000
    No of units required to be produced = (FC + Operating
    income)/Contribution = 1373595

    C. Operating income after taxes ($450000 dividend + $150000 profits) $450000


    Selling Price $6.95
    Variable cost per unit $3.73
    Contribution margin per unit $3.2
    Operating income before tax (assuming 50% of the revenue goes as tax to the
    government) $900000
    Total Fixed Cost $3690000
    No of units required to be produced = (FC + Operating income)/Contribution=1434375

    D. Operating income after taxes ($450000 dividend + $150000 profits) $600000


    Contribution margin per unit $3.2
    Operating income before tax (assuming 50% of the revenue goes as tax to the
    government) $1200000
    Total Fixed Cost $3690000
    No of units required to be produced = (FC + Operating income)/Contribution =1528125

    3. Can the break-even analysis help the company decide whether to alter
    the existing product emphasis? What can the company afford to invest for
    Additional C" capacity?

    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
    4. Calculate each of the three products' 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?

    Column1 Aggregate A B C
    Sales at full capacity (units) 2000000
    Actual Sales Volume (units) 1500000 600000 400000 500000
    Unit Sales Price $7.20 $10 $9 $2.40
    Sales Revenue $10,800,000 $6,000,000 $3,600,000 $1,200,000
    Variable Cost per unit $4.50 $7.50 $3.75 $1.50
    Contribution margin per unit $2.70 $2.50 $5.25 $0.90
    Total Variable Costs $6,750,000 $4,500,000 $1,500,000 $750,000
    Fixed Costs $2,970,000 $960,000 $1,560,000 $450,000
    Profit $1,080,000 $540,000 $540,000 $0
    RATIOS
    Variable cost to sales 0.625 0.75 0.41666 7 0.625
    Unit contribution to sales 0.375 0.25 0.58333 3 0.375
    Utilization of capacity 75.00% 30% 58% 37.50%
    Break Even Point (units) 1100000 384000 297143 500000

    5. Is this type of analysis of any value'?' For what can it be used?


    The following are the benefits of the breakeven analysis: The breakeven 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/or 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. It is also versatile enough to include items like donations, wage
    increases, etc. that directly or indirectly affect costs

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