Case 16-3 Bill French

The change in the contribution margin for all the products is responsible for the change in profitability.

8.20 equals $ 86,700. The contribution margin per unit at a retail price of Cr. 6.85 equal 1.95. The required volume will be the result of dividing the profit impact on the contribution margin per unit.

Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%

There would still be a net loss in 2006 due to the increase of break-even point, which increased from $7,505 to $8,640.

After that monthly equipment production could be increased to 3,500 units and the price of equipment were cut from $1,580 to $1,400 per unit, the net income will reduce from $930,000 to $455,000 even monthly sales increasing to $4,900,000. But, the variable costs and fixed costs also dramatically increase to $2,625,000 and $1,820,000. Therefore, I wouldn’t suggest that this action be taken. As follow:

In our second assumption, instead of using the cost of goods per cases in 1986, we try to use the percentage it counts in the total expenses which is 50.4% and to find the sales needed to break-even. The detail of the calculation is shown in the answer for questions d. The result is that 95,635, a little bit higher than the estimated sales of 90,000.

(Note – It is assumed that the price elasticity of demand is constant over the period of time.)

This question gives students an opportunity to exercise their ability to interpret break-even analyses. Key teaching points should include explaining the preparation of a break-even chart, the interpretation of the break-even volume (938,799 hectoliters [HL]), and the comparison of the break-even volume to the current volume (1,173,000 HL). Another key point is that the chart in case Exhibit 5 is relevant only for the current cost structure of the company—if variable costs increase or the plant expansion is approved, the break-even volume will rise. Finally, students should be aided in understanding that “break-even” refers to operating profit, not free cash flow. The typical use of the break-even chart ignores taxes, investments, and the depreciation tax shield.

* What is the role provided by break-even point and how would you calculate this point?

Mysti Farris (See problem 1-19) is considering raising the selling price of each cue to $50 instead of $40. If this is done while the costs remain the same, what would the new breakeven point be? What would the total revenue be at this breakeven point? (Given in problem 1-19: fc of 2400 and vc of 25)

In looking at the next possibility where we can use the break even analysis, it would involve the question of how to manufacture a product, in terms of the nature of operations and how it will affect fixed costs. In this instance, we as a company may have a good idea on the quantity expect, the likely selling price, and the variable costs involved, but be uncertain about how to structure the new operation. For example, if the volume expected to be 15,000 units, at a selling price of $5 and variable costs of $3, the break even equation tells us that the fixed costs cannot be greater

The other assumptions of the management are that the selling price for goods will be the same in 2007 and that top line growth will be 3% assuming no acquisition in 2007. If in 2007, the

The ultimate goal of any firm is to generate profit. Steve Lefever states that there are two ways to generate profit: you can simply go from day to day and hope it happens or, you can identify the primary “drivers” of profitability and manage them. It is important for managers to manage how the sales dollars flow through the firm. Break-even analysis can help a firm make significantly better decisions for the future. This analysis is a very useful and effective method of assessing cost volume profit relationship. “The Contribution Margin and Break Even Analysis” simulation requires maximization of

Manufacturers deals with fix and variable cost. Increasing production a maximum capacity reduces total product cost but increase inventory handling cost. Producing only the quantities requested by market place affects capacity increasing manufacturing cost. Manufacturers managing cost reduction and capacity cost evaluating strategies for mass production, price reduction and decoupling points (Chopra & Meindl, 2007).

A calculation of break-even point (in units) for the year ended 2001. For the purposes of simplifying this calculation, you should assume that ONLY direct material and direct labour costs are considered variable with respect to changes in volume. Clearly identify your assumption regarding the sales mix in your calculation and specify why this assumption is important in the context of CVP analysis.