1. What are the assumptions implicit in Bill French’s determination of his company’s breakeven point? There are a number of simplifying assumptions made by Bill French in his calculations of the breakeven point of his company, Duo – Products Corporation. First, he had assumed that the market conditions will remain the same. Second, his calculations are based on the last year prices; it does not take into account in any change in prices. Third, he also ignores any changes in the fixed and variable costs of the product, which is pointed out by Fred Williams during the meeting.
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In making the above assumption, he also assumes that the plant capacity will remain the same. Lastly, he has assumed that the sales will be the same as the previous year and also there would be no change in the sales of the different products, i. e. product mix. 2. On the basis of French’s revised information, what does the new year look like: a. What is the breakeven point The breakeven point for the new analysis comes out to be 9. 64 million units b. What level of operations must be achieved to pay the extra dividend, ignoring union demands The level for meeting dividends is 12. 80 million units . What level of operations must be achieved to meet union demands, ignoring bonus dividends? The level for meeting union demands is 13. 26 million units d. What level of operations must be achieved to meet both dividends and union requirements? The level for meeting dividends and union demands is 14. 13 million units 3. Can the breakeven analysis help the company to decide whether to alter the existing product emphasis? What can the company afford to invest for additional “C” capacity? The breakeven analysis is very helpful in taking decisions about the volumes to be produced for each product line.
The calculations with the modified data has been done in the next page where, the breakeven point for the company is coming as 9. 64 million units (aggregate) and 10. 15 million units (individual product lines). The calculations show us that contribution of A to the total is just 25% and for C is 68. 75%. Thus the company must invest more in the product line C for better profits. The company can afford to invest the additional capacity of the other products A and B to invest in C. The additional capacity of A is -77,000 units and for B is 280,000 units.
Thus the additional capacity that can be invested in C is close to 200,000 units of C. 4. Calculate the each of the products break even analysis using the data in Exhibit 3. Why is the aggregate breakeven point different? The aggregate fixed costs is not divided equally among all the products, thus the profit and the breakeven point will not be equal for all products and it will not match with the calculations done by the aggregate method. The contribution per unit of the different products is different and not equal to the average contribution that is derived by Bill French.
Thus for the above 2 reasons, the breakeven point is different 5. Is this type of analysis useful of any value? For what can it be used? These calculations help us to understand the cost-volume relationship, how costs behave as the level of activity in a company changes. By establishing the CVP estimates, we can calculate the safety margin for the company and the profit behaviour of the company. It will also help us recognize the areas where cost is shooting up and thus the company can employ cost cutting measures for it.