Bridgestone Case Analysis

1. CM/Total Rev = WACM 3,500,000/5,000,000 = .70*100 = 70%

2. A high WACM means that a high percentage of every dollar earned is profit. This means that Bridgestone is keeping the variable costs at a relatively small proportion of the total costs. The fact that the Margin of Safety is $9,000 out of $5,000,000 in revenue might be taken as an indication that they are not doing a good job of controlling overhead, depending on how you define overhead.

3. The CVP does allow you to come up with a breakeven plan. The question is will they be able to achieve a breakeven plan since they already have such a low Margin of Safety and general economic issues, government cut-backs, Medicaid/Medicare function reductions, the overall reduction of people on insurance, and the unemployment rate causing less availability of private pay clients.

4. Breakeven sales = $4,991,000 Total Sales – Breakeven sales = .7

This number should let Dr. Russell know he has virtually no room for any increase in expenses and he cannot allow revenues to drop. He must also try to determine if he has any current expenses that can be reduced.

5. 3,493,700 – 10% = 3,144,330.00 (If you are assuming the question meant reduction of total expenses by 10% so rent and depreciation are being included in the 10% reduction. If you conclude the question means that rent and depreciation would not be included in the 10% reduction, this number would be different.)

This would change the breakeven point to $4,644,330 and would allow for a savings of $349,370.00 in expenditures and provide an opportunity for Bridgestone to have a wider margin of safety.

Possible fixed discretionary areas from which the 10% reduction savings could be realized: Office supplies Transportation Other Consulting Fees
But clearly, these amounts would have to be reduced