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BILL FRENCH
Bill French picked up the phone and called
his boss, Wes Davidson, controller of Duo-
Products 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. 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 break-
even, and that the pretax profits accruing
(at the rate of 37.5 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)
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office. Davidson introduced French to chart pointed to a profitable year,

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
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................................ Staff Accountant
Wes Davidson ......................... Controller
John Cooper ............................ Production Control
Fred Williams........................... Manufacturing
Ray Bradshaw ......................... Assistant Sales Manager
Arnie Winetki ........................... General Sales Manager
Anne Fraser............................. Administrative Assistant
to President

(bill french: p. 2/5)

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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 break-
even 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 “A” “B” “C”

Sales at full capacity (units) 2,000,000

Actual sales volume 1,500,000 600,000 400,000 500,000
Unit sales price $7.20 $10.00 $9.00 $2.40
Total 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
Total variable cost 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 0.42 0.625
Unit contribution to sales 0.375 0.25 0.58 0.375
Utilization of capacity 75% 30% 20% 25%

Ray Bradshaw: Guess I may as well get shift in our product mix. The “A” line is
in on this one, Bill. If you’re going to do really losing out, and I imagine that we’ll
anything with individual products, you be lucky to hold two-thirds of its volume
ought to know that we’re looking for a big next year. Wouldn’t you buy that, Arnie?

(bill french: p. 3/5)


(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.
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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
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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?
d. 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)