...Strategic cost analysis & management: Case Study Bill French Accountant Takeaways Bill French, aggregated BEP basic Sales volume Unit sales price (+) Sales revenue Unit var. cost (-) Total VC (=) Contribution margin (-) Fixed cost (=) Operating profit (-) Taxes (=) Net Profit after taxes Dividends (=) Net Profit 1 076 406 1,159 1 247 400 0,56 607 401 640 000 640 000 0 0 0 0 0 basic+ dividend 1 328 688 1,159 1 539 760 0,56 749 760 790 000 640 000 150 000 75 000 75 000 75 000 0 basic+ union 1 189 275 1,159 1 378 200 0,62 738 200 640 000 640 000 0 0 0 0 0 + dividend + union 1 470 093 1,159 1 701 216 0,62 911 216 790 000 640 000 150 000 75 000 75 000 75 000 0 Bill French, line-by-line BEP basic Sales volume at aggregated BEP 1 076 406 basic+ union 1 189 275 BEP A (in units) BEP B (in units) BEP C (in units) 170 000/0,42= 404 762 275 000/0,88 = 314 286 195 000/0,55 = 354 545 170 000/0,30 = 576 271 275 000 / 0,81 = 338 462 195 000/0,53 = 371 429 Bill French, aggregated CVP calculations basic Sales volume Unit sales price (+) Sales revenue Unit var. cost (-) Total VC (=) Contribution margin (-) Fixed cost (=) Operating profit (-) Taxes (=) Net Profit after taxes Dividends (=) Net Profit 1 160 500 1,159 1 344 854 0,56 654 854 690 000 640 000 50 000 25 000 25 000 0 25 000 + dividend 1 412 783 1,159 1 637 214 0,56 797 213 840 000 640 000 200 000 100 000 100 000 75 000 25 000 + union 1 282 188 1,159 1 485 873 0,62 795 872 690 000 640 000 50 000 25 000 25 000 0 25 000...
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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...
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...Case Study Analysis : Bill French Based on Break Even Point INTRODUCTION * Bill French was a Staff Accountant in Duo-Products Group. * He used to report directly to his boss, Wes Davidson(Comptroller). * He wanted to do use Break-even analysis for the planning procedures, which was first of its kind for the Duo-Products Group. * 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, 1. 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. 2. Further, it will not make a profit unless it covers the fixed costs as well. 3. The level of operation at which total costs are just covered is the break-even volume. 4. This should be the lower limit in the planning. ACCOUNTING RECORDS * The accounting records had provided the following information that French used in constructing his chart: 1. Plant Capacity -2 million units per year. 2. Past year’s level of operations - 1.5 million units. 3. Average unit selling price - $7.20. 4. Total fixed costs - $2,970,000. 5. Average unit variable costs - $4.50. * From the above information, French observed that 1. Each unit contributed $2.70 to fixed costs after covering its variable costs. 2. For break even, unit sold must be 1,100,000. 3. As variable costs per unit is 62.5% of the...
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...1. What are the assumptions implicit in Bill French’s determination of his company’s break-even point * Bill was using volume base costing, when he is doing calculation for O/H he didn't pay any attention to product base calculation. So he cannot know the effects of the product to cost. With his calculation it is not so easy to decide to go ahead to producing which products. * For the right break-even point calculation it is necessary to make a calculation product base break-even point. And Bill was thinking all the cost are remaining same, especially the variable costs. * At the same time Bill didn't realize there is a dividend which company has to pay every year and this year has additional dividend payment and union has some special request, it brings additional cost on variable cost. * Bill was thinking the sales and the production strategy for the product will remain same and he will be able to use empty capacity for C production. But the management will reduce the production of A product and will increase the production of C product. * There are also changes on sale price of C, this will also effect whole calculation 2. On the basis of French’s revised information, what does next year look like? a) What is Break-even point | | | | | Formulation | Break-even point units = Fixed Cost / Contribution margin per unit | Contribution margin per unit= Selling Price- Variable cost per unit. | Current Situation | Sales of full capacity...
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...Question 5 The Value of Break-even Analysis Break-even analysis is a basic tool that can be used to determine the level of sales that is requiredfor the company to start earning a profit. Helps understand and formulate the relationship between costs (fixed and variable), output and profit Helps quickly observe profit levels at different outputs. In a wide product range, the analysis helps to find out which products are performing well andwhich are leading to losses. The technique can be used to set sales targets and/or prices to generate target profits It is also versatile enough to include items like donations, wage increases, etc. that directly or indirectly affect costs. Conclusions and Recommendations We can conclude that the use of break-even point analysis is to give a measure of risk, not of profitability. Break-even point enables to assess the degree of risk of a company’s cost structure. A planning tool that useful to forecast financial needs.CVP analysis is not for discontinuing decisions. A negative/positive UCM is not the only relevantcriteria to decide whether or not to drop a product. CVP analysis is insufficient for discontinuingdecisions (outsourcing, change in the product portfolio, etc..) and need to know the nature of fixed costs(direct and indirect) and what are the direct avoidable versus indirect largely unavoidable cost.CVP analysis is not for comparing products. Basic UCMs usually do not tell us which...
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...Profit & Loss statement (also referred as Income statement), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. Purpose of Profit & Loss Statement: The purpose of the income statement is to show mangers and investors whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. The income statement can be prepared in one of two methods. The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating and, when deducted from the gross profit, yields income from operations. Adding to income from operations...
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...GOVERNMENT REGULATION IS GOVERNMENT MONOPOLY: THE EXAMPLES OF BRITISH AGRICULTURE AND THE BRITISH STOCK EXCHANGE SEÁN CRONIN Pretty much everyone agrees that monopolies — government-run or government-backed, coercive controls over the production, distribution or purchase of particular categories of product or service — are bad for society, i.e. for pretty much everybody. One only has to remember the record of British Leyland — a government industrial monopoly that did considerably more damage to the British motor industry than the Luftwaffe — to see that monopolies are harmful.1 The only exception to this generally agreed belief seems to run along the lines of “all monopolies are bad except when I or my friends are in control ”, which helps to explain why monopolies are so popular with governments. So this essay will not attempt to argue that monopolies are bad, any more than it will attempt to argue that the earth is round. The point I wish here to make is that monopolies, because they are so much more numerous, are accordingly causing much more harm, than is commonly thought. I will focus on two examples, both of which show a monopoly in action and doing great harm, even though at first glance there doesn’t appear to be any monopoly at all. EVERY GOVERNMENT REGULATORY AGENCY IS A MONOPOLY The first example is the long running saga of BSE. Bovine Spongiform Encephalopathy is a disease suffered by British beef cattle during the nineteen eighties and nineties, which is believed...
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...© 1998 American Accounting Association Accounting Horizons Vol. 12 No. 4 December 1998 pp. 363–373 Financial Information and Quality Management—Is There a Role for Accountants? Leif M. Sjoblom Leif M. Sjoblom is a Professor at the International Institute for Management Development. SYNOPSIS: Different opinions exist with respect to the usefulness of financial information for operational decision making. While academics encourage the provision of accounting information on quality, few companies provide it. This article explores the usefulness (or lack thereof) of Cost of Quality (COQ) and quality-related financial information through the use of a survey and informal discussions and interviews with quality managers. Financial information can be used to flag quality problems, to select and prioritize quality improvement projects and to choose corrective action. The results suggest that financial information has a limited role in supporting these operational decisions. The limitations of current COQ systems, and the lack of relevant, reliable and timely financial information, are among the reasons cited for not using COQ. However, there is a perceived need for additional financial reporting in order to attract the attention of top management and to motivate managers. In order to make COQ more relevant to practitioners, future research must not only focus on improving and disseminating best practices, but also on the multi-disciplinary implementation process. Data Availability:...
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...Changes on Planning Production after recomendations that were suggested on the metting: 1) To begin I want to list the assumptions that I considered aggregated information of the three product lines: a) Sales Assumption: Assume sales prices and quanties (sales mix) per each product as invarible and b) Costs Assumptions: Assume variable cost and fixed cost remain the same por each product line, the same prime costs for variable costs and the same plant capacity for fixed cost. 2) After I review the information provided for you the next year will look like: a) Break-even point: Sales – Variable Cost – Fixed Cost = Net Income 0 Production Weight * X * A Unit Contribution Margin + B Production Weight * x * B Unit Contribution Margin + C Production Weight * X* C Unit Contribution Margin – Total Fixed Costs =0 0.22* X* ($0.42) +0.25*X*($0.88)+ 0.53*X*($0.55)-$640,000=0 $0.09*x+$0.22*X+$0.29*X-$640,000=0 $0.602*X =$640,000 X=($640,000/0.602) = 1,062,486 Units BEP in Sales = BEP in Units* Aggregate Units Sales Prices BEP in Sales = 1,062,486 units * 1.17US$/Units BEP in Sales = $1,241,337 b) The level of operations that the company must to achieved to pay the extra dividend Ignoring union demands. Consider that the net income will be US$200,000 composed by: US$50,000 tostockholers, US$25,000 hold for business, dividend extra US$25,000 and extra US$50,000 to hit $100,000 after the cost of beign governed. Sales – Variable Cost – Fixed Cost = Net Income $0.09*x+$0.22*X+$0...
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...1. Bill has assumed that Duo-Products' relevant range for fixed costs will remain constant even after planned expansion of production capacity. He has also 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. Two other assumptions are that total revenue and total expenses behave in a linear manner over the relevant range. These 2 are standard when Cost Volume Profit analysis is carried out. 2. a) There is an extra $720,000 a year in fixed costs estimated by Fred Williams for this year. Since 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 as there isn't any information as to whether its relevant range of fixed costs will change, I have left its level of fixed costs unchanged. As a result both A's and B's break even points remain the same. For C the breakeven point is 354,545 units. The overall breakeven point is 1,035,686 units. b) Duo-Products must make a $1.2 million profit before tax to meet this requirement. To do this it must sell 1,372,494 units. c) An increase in variable costs across the board by 10% would increase the average variable cost to $3.72 per unit. For Duo-Products to break even under these conditions it would need to sell 1,144,440 units. d) Duo-Products would have to sell 1,516,615 units to meet both the...
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...AFRICA NAZARENE UNIVERSITY TOPIC: BUSINESS PLAN BY; STUDENT NAME:TEDDY KIBE STUDENT ID NUMBER: 14S . LECTURER: MR. MUHIA DATE OF SUBMISSION: 22/10/ 2014. 1.0Introduction Teddy Banks Boutique is a start-up retail establishment that will sell fashionable clothing to men of the young generation. The name Teddy Banks was derived from the first name of the owner of the business i.e. Teddy .The main reason for selecting a cloth retail business is identifying a gap that needs to be filled in the fasion industry for men attire which is constantly evolving with time The need that these business wishes to meet in the society is to provide fasionable designs for men at affordable prices and conveniently delivering to busy customers who cant make it to pass by the boutique due to their busy schedules since most of my customers are either students, job seekers and newly employed graduates. Objectives * To create a shoping environment that caters to appeal the needs of the digital age youthfull age. * To be an active and vocal member in the community by supporting fasion events. * To receive an annual profit margin of 50% in the first year. Mission To offer quality, name brand wear in different sizes and styles tio accommodate all the varying body sizes amd shapes. Keys to success Provide customers with a top notch personalized customer service in a hospitable environment. Advertise and promote the boutique in areas that our target...
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...11 178202 BILL FRENCH, ACCOUNTANT Bill French pegou o telefone e ligou para seu chefe, Wes Davidson, "controller" da Duo-Products Corporation. "Wes, estou pronto para a reunião de hoje a tarde. Elaborei uma série de gráficos de ponto de equilíbrio que irão realmente surpreender o pessoal - e acho que eles também poderão entendê-los". Após conversarem sobre outros assuntos, o telefonema foi concluído e French voltou aos seus gráficos para dar os últimos retoques antes da reunião. French fora contratado há seis meses como contador geral. Ele estava diretamente subordinado a Davidson sendo que, até a época deste caso, estivera envolvido em tipos rotineiros de análises. French era formado em administração, sendo considerado por seus colegas como bastante capaz e extremamente consciencioso. Era esta última característica que aparentemente o levava a ser extremamente severo com seus pares. French tinha plena consciência de suas capacidades aproveitando toda oportunidade que surgisse para tentar ensinar aqueles que o cercavam. O convite de Wes Davidson para French comparecer a uma reunião informal da Diretoria tomou de surpresa alguns do grupo de contabilidade. No entanto, quando French pediu permissão para apresentar as conclusões de sua análise, utilizando gráficos de pontos de equilíbrio, Davidson concordou. A Duo-Products Corporation nunca havia utilizado este tipo de análise em suas revisões ou programas de planejamento. Basicamente, o...
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...BILL FRENCH I. BACKGROUND AND ISSUES Bill French was staff accountant of Duo-Products Corporation. He was reporting to Wes Davidson and had been doing routine types of analytical work. In an informal manager’s meeting, Davidson invited Bill French to attend. French choose to present break-even data to determine the level at which the company must operate in order to break-even. During the meeting, French was challenged and questioned because his presentation failed to consider some aspects of the company’s operation such plans for expansion in sales and production, the product mix and prices on individual product basis since he was only using “averaging”. This is because of his following assumption: • 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. Total revenue and total expenses behave in a linear manner over the relevant range. • 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 He also failed to consider the interest of other stakeholders such as taxes, dividends, expected union demands and the question on product emphasis. French is requested to prepare a thorough break-even analysis taking into account all the series of assumptions...
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...BILL FRENCH CASE Question 1: What are the assumptions implicit in Bill French’s determination of his company’s break-even point? The following assumptions are implicit in Bill French’s determination: • 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 • He has also assumed that the sales mix will remain constant. Total revenue and total expenses behave in a linear manner over the relevant range • 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 Question 2: On the basis of French’s revised information, what does next year look like? a. What is the break-even point? Calculation of the break even points using the new estimates: Breakeven points have been calculated using the formulae: Breakeven number of units = Fixed costs / Contribution margin per unit Where Contribution margin per unit = Selling price – Variable cost per unit Aggregate "A" "B" "C" Sales at full capacity (units) 2000000 Sales Volume (units) 1750000 400000 400000 950000 Unit Sales Price $6.948 $10 $9 $4.8 Sales Revenue $12160000 $4000000 $3600000 $4560000 Variable Cost per unit $3.385 $7.5 $3.75 $1.5 Contribution margin per unit $3.56 $2.5 $5.25 $3...
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...CASE : BILL FRENCH 1. What are the assumptions implicit in Bill French’s determination of his company’s break-even point? Assumptions Sales volume will be maintained. No planned changes in volume next year Only one, aggregate break-even point is utilized in the analysis. Sales mix will remain constant. Linearity will be exhibited by both total revenues and expenses over the relevant range. No capital investments that will increase fixed costs. Constant dividends are paid out to the company’s stockholders. Labor union will not significantly affect cost structure. No substantial changes in product prices. Given Information: 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 Breakeven Point (Original Sales) Aggregate A 2,000,000 1,500,000 600,000 $7.20 $10.00 10,800,000 6,000,000 4.50 7.50 6,750,000 4,500,000 2,970,000 960,000 1,080,000 540,000 0.625 0.375 75% 0.75 0.25 30% B 400,000 $9.00 3,600,000.000 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% 2. On the basis of French’s revised information, what does next year look like: a. What is the break-even point? Breakeven Point (Reallocated Sales) Aggregate A 2,000,000.000 0.229 1,750,000.000 400,000.000 7.200 10.000 12,600,000.000 4,000,000.000 4.500 8.250 3,690,000.000 640,000.00 2.700...
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