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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: Breakeven Point (Original Sales) 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
3,600,000.000
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%
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 B C
Sales at Full Capacity (units)
2,000,000.000
Sales Mix 0.229 0.229 0.543
Actual Sales Volume
1,750,000.000 400,000.000 400,000.000 950,000.000 Unit Sales Price 7.200 10.000 9.000 4.800
Total Sales Revenue
12,600,000.000
4,000,000.000