Bill French

RESTRICTED INTERNAL USE ONLY BILL FRENCH Bill French picked up the phone and called his boss, Wes Davidson, controller of DuoProducts Corporation. “Wes, I’m all set for the meeting this afternoon. I’ve put together a set of break-even statements that should really make people sit up and take notice – and I think they’ll be able to understand them, too. ” After a brief conversation, French concluded the call and turned to his charts for one last checkout before the meeting. French had been hired six months earlier as a staff accountant.

He was directly responsible to Davidson and had been doing routine types of analytical work. French was a business school graduate and was considered by his associates to be quite capable and unusually conscientious. It was this later characteristic that had apparently caused him to “rub some of the working folks the wrong way,” as one of his coworkers put it. French was well aware of his capabilities and took advantage of every opportunity that arose to try to educate those around him. Davidson’s invitation for French to attend an informal manager’s meeting had come as a surprise to others in the accounting group.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

However, when French requested permission to make a presentation of some break-even data, Davidson acquiesced. Duo-Products had not been making use of this type of analysis in its planning procedures. 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, 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. Further, it will not make a profit unless it covers the fixed costs as well. The level of operation at which total costs are just covered is the break-even volume.

This should be the lower limit in all our planning. The accounting records had provided the following information that French used in constructing his chart: Plant capacity – 2 million units per year Past year’s level of operations – 1. 5 million units Average unit selling price – $7. 20 Total fixed costs – $2,970,000 Average unit variable cost – $4. 50 From this information French observed that each unit contributed $2. 70 to fixed costs after covering its variable costs. Given total fixed costs of $2,970,000, he calculated that 1,100,000 units must be sold in order to break even.

He verified this conclusion by calculating the dollar sales volume that was required to break even. Since the variable costs per unit were 62. 5 percent of the selling price, French reasoned that 37. 5 percent of every sales dollar was left available to cover fixed costs. Thus, fixed costs of $2,970,000 required sales of $7,920,000 in order to break even. When he constructed a break-even chart, his conclusions were further verified. The chart also made it clear that the firm was operating at a fair margin above breakeven, and that the pretax profits accruing (at the rate of 37. percent of every sales dollar over break even) increased rapidly as volume increased (see Exhibit 1 at p. 2). Shortly after lunch, French and Davidson left for the meeting. Several representatives of the manufacturing departments were present, as well as the general sales manager, two assistant sales managers, the purchasing officer, and two people from the product engineering (bill french: p. 1/5) RESTRICTED INTERNAL USE ONLY office. Davidson introduced French to the few people whom he had not already met, and then the meeting got under way. French’s presentation was the last item on the agenda.

In due time the controller introduced French, explaining his interest in cost control and analysis. French had prepared copies of his chart and supporting calculations for everyone at the meeting. He described carefully what he had done and explained how the chart pointed to a profitable year, dependent on meeting the sales volume that had been maintained in the past. It soon became apparent that some of the participants had known in advance what French planned to discuss; they had come prepared to challenge him and soon had taken control of the meeting.

The following exchange ensued (see Exhibit 2 for a list of participants and their titles): Exhibit 1. Break-Even Chart – Total Business Exhibit 2. List of Participants in the Meeting Bill French………………………….. Wes Davidson ……………………. John Cooper ………………………. Fred Williams……………………… Ray Bradshaw ……………………. Arnie Winetki ……………………… Anne Fraser……………………….. Staff Accountant Controller Production Control Manufacturing Assistant Sales Manager General Sales Manager Administrative Assistant to President bill french: p. 2/5) RESTRICTED INTERNAL USE ONLY John Cooper: You know, Bill, I’m really concerned that you haven’t allowed for our planned changes in volume next year. It seems to me that you should have allowed for the sales department’s guess that we’ll boost unit sales by 20 percent. We’ll be pushing 90 percent of capacity then. It sure seems that this would make quite a difference in your figuring. Bill French: That might be true, but as you can see, all you have to do is read the cost and profit relationship right off the chart for the new volume.

Let’s see – at a million eight-hundred-thousand units we’d … Fred Williams: Wait a minute, now! If you’re going to talk in terms of 90 percent of capacity, and it looks like that’s what it will be, you had better note that we’ll be shelling out some more for the plant. We’ve already got approval on investments that will boost fixed costs by at least $60,000 a month. And that may not be all. We may call it 90 percent of plant capacity, but there are a lot of places where we’re just full up and we can’t pull things up any tighter. John Cooper: Fred is right, but I’m not finished on this bit about volume changes.

According to the information that I’ve got here – and it came from your office – I’m not sure that your break-even chart can really be used even if there were to be no changes next year. It looks to me like you’ve got average figures that don’t allow for the fact that we’re dealing with three basic products. Your report on each product line’s costs last year (see Exhibit 3) makes it pretty clear that the “average” is way out of line. How would the breakeven point look if we took this on an individual product basis? Bill French: Well, I’m not sure. It seems to me that there is only one break-even point for the firm.

Whether we take it product by product or in total, we’ve got to hit that point. I’ll be glad to check for you if you want, but … Exhibit 3 Product Class Cost Analysis, Normal Year Aggregate Sales at full capacity (units) Actual sales volume Unit sales price Total sales revenue Variable cost per unit Total variable cost Fixed costs Profit Ratios: Variable cost to sales Unit contribution to sales Utilization of capacity 2,000,000 1,500,000 $7. 20 10,800,000 4. 50 6,750,000 2,970,000 1,080,000 0. 625 0. 375 75% “A” 600,000 $10. 00 6,000,000 7. 50 4,500,000 960,000 540,000 0. 75 0. 5 30% “B” 400,000 $9. 00 3,600,000 3. 75 1,500,000 1,560,000 540,000 0. 42 0. 58 20% “C” 500,000 $2. 40 1,200,000 1. 50 750,000 450,000 0 0. 625 0. 375 25% Ray Bradshaw: Guess I may as well get in on this one, Bill. If you’re going to do anything with individual products, you ought to know that we’re looking for a big shift in our product mix. The “A” line is really losing out, and I imagine that we’ll be lucky to hold two-thirds of its volume next year. Wouldn’t you buy that, Arnie? (bill french: p. 3/5) RESTRICTED INTERNAL USE ONLY (Agreement from the general sales manager. That’s not too bad, though, because we expect that we should pick up the 200,000 that we lose, plus about a quarter million units more, in “C” production. We don’t see anything that shows much of a change in “B”. That’s been solid for years and shouldn’t change much now. Arnie Winetki: Bradshaw’s called it about as we figure it, but there’s something else here. We’ve talked about our pricing on “C” enough, and now I’m really going to push our side of it. Ray’s estimate of maybe half a million units – 450,000 I guess it was – increase on “C” for next year is on the basis of doubling the price with no change in cost.

We’ve been priced so low on this item that it’s been a crime – we’ve got to raise it for two reasons. First, for our reputation: the price is out of line with other products in its class and is completely inconsistent with our quality reputation. Second, if we don’t raise the price, we’ll be swamped, and we can’t handle it. You heard what Williams said about capacity. The way the whole “C” field is exploding we’ll have to deal with another half-million units in unsatisfied orders if we don’t jack the price up. We can’t afford to expand that much for this product.

At this point, Anne Fraser walked toward the front of the room from where she had been standing near the rear door. The discussion broke for a minute, and she took advantage of the lull to interject a few comments. Anne Fraser: This certainly has been a helpful discussion. As long as you’re going to try to get all the things together for next year, let’s see what I can add to help you: Number One: Let’s remember that everything that shows in the profit area here on Bill’s chart is divided almost evenly between the government and us.

Now, for last year we can read a profit of about $900,000. That’s right; but we were left with half of that, and then paid out dividends of $300,000 to the stockholders. Since we’ve got an anniversary year coming up, we’d like to put out a special dividend of about 50 percent extra. We ought to retain $150,000 in the business, too. This means that we’d like to hit $600,000 profit after taxes. Number Two: From where I sit, it looks as if we’re going to have negotiations with the union again, and this time it’s likely to cost us.

All the indications are – and this isn’t public – that we may have to meet demands that will boost our production costs – what do you call them here, Bill – variable costs – by 10 percent across the board. This may kill the bonus-dividend plans, but we’ve got to hold the line on past profits. This means that we can give that much to the union only if we can make it in added revenues. I guess you’d say that raises your break-even point, Bill – and for that one I’d consider the company’s profit to be a fixed cost. Number Three: Maybe this is the time to think about switching our product emphasis.

Arnie may know better than I which of the products is more profitable. You check me out on this Arnie – and it might be a good idea for you and Bill to get together on this one, too. These figures that I have (Exhibit 3) make it look like the percentage contribution on line “A” is the lowest of the bunch. If we’re losing volume there as rapidly as you sales folks say, and if we’re as hard pressed for space as Fred has indicated, maybe we’d be better off grabbing some of that big demand for “C” by shifting some of the assets from “A” to “C”.

Wes Davidson: Thanks, Anne. I sort of figured that we’d wind up here as soon as Bill brought out his charts. This is an approach that we’ve barely touched on, but, as you can see, you’ve all got ideas that have to be made to fit here (bill french: p. 4/5) RESTRICTED INTERNAL USE ONLY somewhere. Let me suggest this: Bill, you rework your chart and try to bring into it some of the points that were made here today. I’ll see if I can summarize what everyone seems to be looking for.

First of all, I have the idea that your presentation is based on a rather important series of assumptions. Most of the questions that were raised were really about those assumptions. It might help us all if you try to set the assumptions down in black and white so that we can see just how they influence the analysis. Then, I think that John would like to see the unit sales increase factored in, and he’d also like to see whether there’s any difference if you base the calculations on an analysis of individual product lines.

Also, as Ray suggested, since the product mix is bound to change, why not see how things look if the shift materializes as he has forecast? Arnie would like to see the influence of a price increase in the “C” line; Fred looks toward an increase in fixed manufacturing costs of $60,000 a month; and Anne has suggested that we should consider taxes, dividends, expected union demands, and the question of product emphasis. I think that ties it all together. Let’s hold off on our next meeting until Bill has had time to work some more on this. With that, the meeting disbanded.

French and Davidson headed back to their offices and French, in a tone of concern, asked Davidson, “Why didn’t you warn me about the hornet’s nest I was walking into? ” “Bill, you didn’t ask! ” Questions 1. What are the assumptions implicit in Bill French’s determination of his company’s break-even point? 2. On the basis of French’s revised information, what does next year look like: a. What is the break-even point? b. What level of operations must be achieved to pay the extra dividend, ignoring union demands? c. What level of operations must be achieved to meet the union demands, ignoring bonus dividends? . What level of operations must be achieved to meet both dividends and expected union requirements? 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? 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 aggregated break-even volume? 5. Is this type of analysis of any value? For what can it be used? (bill french: p. 5/5)



I'm Eileen!

Would you like to get a custom essay? How about receiving a customized one?

Check it out