Bill French

The accounting records that French used in constructing his chart:

Plant capacity 2 million units per year

Past years 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 the information, French has concluded the following:

Contribution Margin
BEP in units
BEP in sales

(100.00% - 62.50%)
($2,970,000 / $2.70)
($2,970,000 /37.50%)

37.50%
1,100,000 units
$7,920,000

Exhibit 3: Product Class Cost Analysis, Normal Year

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

Aggregate

2,000,000
1,500,000
$7.20
10,800,000
4.5
6,750,000
2,970,000
1,080,000

600,000
$10.00
6,000,000
7.5
4,500,000
960,000
540,000

400,000
$9.00
3,600,000
3.75
1,500,000
1,560,000
540,000

500,000
$2.40
1,200,000
1.5
750,000
450,000
0

0.625
0.375
75%

0.75
0.25
30%

0.42
0.58
20%

0.625
0.375
25%

Assumptions of French
variable cost per unit will remain constant
total fixed costs will remain constant
there is just one breakeven point for the firm
sales mix will remain constant
sales price per unit will remain constant
CHART I: REVISED ANALYSIS

Unit Capacity
Unit Production
Unit Sales Price
Total Sales Revenue
Variable Unit Cost
Total Variable Costs
Contribution Margin
Fixed Costs
Income
Income Taxes (50%)
Dividends
Retained Earnings

Product A
Last Yr.
Next Yr.

Product B
Last Yr.
Next Yr.

Product C
Last Yr.
Next Yr.

600,000
$10.00
$6,000,000
$7.50
$4,500,000
$1,500,000
$960,000
$540,000
$270,000

400,000
$9.00
$3,600,000
$3.75
$1,500,000
$2,100,000
$1,560,000
$540,000
$270,000

500,000
$2.40
$1,200,000
$1.50
$750,000
$450,000
$450,000
-0-0-

400,000
$10.00
$4,000,000
$8.25
$3,300,000
$700,000
$960,000
($260,000)
($130,000)

Notes:
Total Sales Revenue = Unit Production x Unit Sales Price
Total Variable Costs = Unit Production x Variable Unit Cost
Contribution Margin = Total Sales Revenue - Total Variable Costs
Income = Contribution Margin Fixed Costs
Income Taxes = Income x 50%
Retained Earnings = Income Taxes Dividends

400,000
$9.00
$3,600,000
$4.13
$1,650,000
$1,950,000
$1,560,000
$390,000
195,000

950,000
$4.80
$4,560,000
$1.65
$1,567,500
$2,992,500
$1,170,000
$1,822,500
$911,250

Aggregate
Last Yr.
Next Yr.
2,000,000
2,000,000
1,500,000
1,750,000
$7.20
$6.95
$10,800,000 $12,160,000
$4.50
$3.72
$6,750,000
$6,517,500
$4,050,000
$5,642,500
$2,970,000
$3,690,000
$1,080,000
$1,952,500
$540,000
$976,250
$300,000
$450,000
$240,000
$526,250

Changes incorporated in modification of the above chart:

(1)
(2)
(3)
(4)

Volume of Product "A" reduced by one third, (from 600,000 units to 400,000 units)
Volume of Product "C" increased by 450,000 units, (from 500,000 units to 950,000 units)
Selling price of Product "C" doubled, (from $2.40 to $4.80)
Variable cost per unit, by individual product lines, is increased by 10% of old level, (A, from $7.50 to $8.25; B, from $3.75 to $4.125; C, from
$1.50 to $1.65)
(5) Fixed costs increased by $720,000 and charged against Product "C", (from $450,000 to $1,170,000)
(6) Taxes are charged at 50%,
(7) Dividends are budgeted (regular plus special) at $450,000.
Break-even Point

Fixed costs of operating

Aggregate unit variable income
Break-even units required, $3,690,000 / $3.56
Ratio of variable income to sales, SP. = $6.95, V.I. = $3.56
Break-even dollar volume required, $3,690,000 / .5122

$3,690,000
$3.56
1,036,500 units
0.5122
$7,204,000

To pay the extra dividend, level of operations must be

Target income
Fixed costs of operating
Total
Aggregate unit variable income
Break-even units required, $4,890,000 / $3.56
Ratio of variable income to sales, SP. = $6.95, V.I. = $3.56
Break-even dollar volume required, $4,890,000 / .5122

$1,200,000
$3,690,000
$4,890,000
$3.56
1,374,000 units
0.5122
$9,547,000

To meet union demands, level of operations must be

Target income
Fixed costs of operating
Total
Aggregate unit variable income
Break-even units required, $4,590,000 / $3.23
Ratio of variable income to sales, SP. = $6.95, V.I. = $3.22
Break-even dollar volume required, $4,590,000 / .4647

$900,000
$3,690,000
$4,590,000
$3.23
1,421,000 units
0.4647
$9,877,000

To meet both the dividends and union demands, level of operations must be
Target income
Fixed costs of operating
Total
Aggregate unit variable income
Break-even units required, $4,890,000 / $3.23
Ratio of variable income to sales, SP. = $6.95, V.I. = $3.23
Break-even dollar volume required, $4,890,000 / .4647

$1,200,000
$3,690,000
$4,890,000
$3.23
1,514,000 units
0.4647
$10,523,000

Different assumptions
Fixed Costs
or
Demand
a. No dividend; no
union increase;
increased fixed costs;
b. Pay extra dividend;
no union in increase;
increased fixed costs;
retain (A.T.) $150,000
c. Pay extra dividend
and union increase;
increase fixed costs;
retain (A.T.) $150,000
d. No extra dividend;
no union increase;
increased fixed costs;
retain (A.T.) $150,000
e. Allow union
increase; pay no extra
dividend; increased
fixed costs; retain
(A.T.) $150,000
f. No profit, no loss
(BEP)

S.P.
- V.C.=
V.I.

B.E.
Units
Required

V.I. / S.P.

B.E.
$ Volume
Required

3,690,000

3.56

1,036,500

51.22%

7,204,000

4,890,000

3.56

1,374,000

51.22%

9,547,000

4,890,000

3.23

1,514,000

46.47%

10,523,000

4,590,000

3.56

1,289,300

51.22%

8,961,000

4,590,000

3.23

1,421,000

46.47%

9,877,000

3,690,000

3.23

1,142,400

46.47%

7,940,000

Values of the analysis

It helps understand and formulate the relationship between costs (fixed and variable), output and
profit.
It can be used to set sales targets and/or prices to generate target profits
It helps to find out which products are performing well and which are leading to losses