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BILL FRENCH
Bill French picked up the phone and called his oss! "es Da#idson! controller o$ Duo%&roducts Corporation' ("es! I)* all set $or the *eetin+ this a$ternoon' I)#e put to+ether a set o$ reak%e#en state*ents that should reall, *ake people sit up and take notice - and I think the,)ll e a le to understand the*! too'. A$ter a rie$ con#ersation! French concluded the call and turned to his charts $or one last checkout e$ore the *eetin+' French had een hired si/ *onths earlier as a sta$$ accountant' 0e 1as directl, responsi le to Da#idson and had een doin+ routine t,pes o$ anal,tical 1ork' French 1as a usiness school +raduate and 1as considered , his associates to e 2uite capa le and unusuall, conscientious' It 1as this later characteristic that had apparentl, caused hi* to (ru so*e o$ the 1orkin+ $olks the 1ron+ 1a,!. as one o$ his co1orkers put it' French 1as 1ell a1are o$ his capa ilities and took ad#anta+e o$ e#er, opportunit, that arose to tr, to educate those around hi*' Da#idson)s in#itation $or French to attend an in$or*al *ana+er)s *eetin+ had co*e as a surprise to others in the accountin+ +roup' 0o1e#er! 1hen French re2uested per*ission to *ake a presentation o$ so*e reak%e#en data! Da#idson ac2uiesced' Duo%&roducts had not een *akin+ use o$ this t,pe o$ anal,sis in its plannin+ procedures' Basicall,! 1hat French had done 1as to deter*ine the le#el at 1hich the co*pan, *ust operate in order to reak e#en' As he put it! The co*pan, *ust e a le at least to sell a su$$icient #olu*e o$ +oods so that it 1ill co#er all the #aria le costs o$ producin+ and sellin+ the +oods' Further! it 1ill not *ake a pro$it unless it co#ers the $i/ed costs as 1ell' The le#el o$ operation at 1hich total costs are 3ust co#ered is the reak%e#en #olu*e' This should e the lo1er li*it in all our plannin+' The accountin+ records had pro#ided the $ollo1in+ in$or*ation that French used in constructin+ his chart4 &lant capacit, - 5 *illion units per ,ear &ast ,ear)s le#el o$ operations - 6'7 *illion units A#era+e unit sellin+ price % 89'5: Total $i/ed costs % 85!;9:!::: A#era+e unit #aria le cost % 8<'7: Fro* this in$or*ation French o ser#ed that each unit contri uted 85'9: to $i/ed costs a$ter co#erin+ its #aria le costs' =i#en total $i/ed costs o$ 85!;9:!:::! he calculated that 6!6::!::: units *ust e sold in order to reak e#en' 0e #eri$ied this conclusion , calculatin+ the dollar sales #olu*e that 1as re2uired to reak e#en' Since the #aria le costs per unit 1ere >5'7 percent o$ the sellin+ price! French reasoned that ?9'7 percent o$ e#er, sales dollar 1as le$t a#aila le to co#er $i/ed costs' Thus! $i/ed costs o$ 85!;9:!::: re2uired sales o$ 89!;5:!::: in order to reak e#en' "hen he constructed a reak%e#en chart! his conclusions 1ere $urther #eri$ied' The chart also *ade it clear that the $ir* 1as operatin+ at a $air *ar+in a o#e reak% e#en! and that the preta/ pro$its accruin+ @at the rate o$ ?9'7 percent o$ e#er, sales dollar o#er reak e#enA increased rapidl, as #olu*e increased @see E/hi it 6 at p' 5A' Shortl, a$ter lunch! French and Da#idson le$t $or the *eetin+' Se#eral representati#es o$ the *anu$acturin+ depart*ents 1ere present! as 1ell as the
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+eneral sales *ana+er! t1o assistant sales *ana+ers! the purchasin+ o$$icer! and t1o people $ro* the product en+ineerin+ o$$ice' Da#idson introduced French to the $e1 people 1ho* he had not alread, *et! and then the *eetin+ +ot under 1a,' French)s presentation 1as the last ite* on the a+enda' In due ti*e the controller introduced French! e/plainin+ his interest in cost control and anal,sis' French had prepared copies o$ his chart and supportin+ calculations $or e#er,one at the *eetin+' 0e descri ed care$ull,

1hat he had done and e/plained ho1 the chart pointed to a pro$ita le ,ear! dependent on *eetin+ the sales #olu*e that had een *aintained in the past' It soon eca*e apparent that so*e o$ the participants had kno1n in ad#ance 1hat French planned to discussC the, had co*e prepared to challen+e hi* and soon had taken control o$ the *eetin+' The $ollo1in+ e/chan+e ensued @see E/hi it 5 $or a list o$ participants and their titlesA4

Exhibit 1. Break-Even Chart Total Business

Exhibit 2. List of Participants in the Meetin Bill French................................ Wes Davidson.......................... John Cooper............................. Fred Williams........................... Ra Bradsha!.......................... Arnie Winet"i............................ Staff Accountant Controller Production Control Manufacturing Assistant Sales Manager #eneral Sales Manager

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Anne Fraser.............................

Administrative Assistant to President

John Cooper: You kno1! Bill! I)* reall, concerned that ,ou ha#en)t allo1ed $or our planned chan+es in #olu*e ne/t ,ear' It see*s to *e that ,ou should ha#e allo1ed $or the sales depart*ent)s +uess that 1e)ll oost unit sales , 5: percent' "e)ll e pushin+ ;: percent o$ capacit, then' It sure see*s that this 1ould *ake 2uite a di$$erence in ,our $i+urin+' Bill French: That *i+ht e true! ut as ,ou can see! all ,ou ha#e to do is read the cost and pro$it relationship ri+ht o$$ the chart $or the ne1 #olu*e' Let)s see - at a *illion ei+ht%hundred%thousand units 1e)d D Fred Williams: "ait a *inute! no1E I$ ,ou)re +oin+ to talk in ter*s o$ ;: percent o$ capacit,! and it looks like that)s 1hat it 1ill e! ,ou had etter note that 1e)ll e shellin+ out so*e *ore $or the plant' "e)#e alread, +ot appro#al on in#est*ents that 1ill oost $i/ed costs , at least 8>:!::: a *onth' And that *a, not e all' "e *a, call it ;: percent o$

plant capacit,! ut there are a lot o$ places 1here 1e)re 3ust $ull up and 1e can)t pull thin+s up an, ti+hter' John Cooper4 Fred is ri+ht! ut I)* not $inished on this it a out #olu*e chan+es' Accordin+ to the in$or*ation that I)#e +ot here - and it ca*e $ro* ,our o$$ice - I)* not sure that ,our reak%e#en chart can reall, e used e#en i$ there 1ere to e no chan+es ne/t ,ear' It looks to *e like ,ou)#e +ot a#era+e $i+ures that don)t allo1 $or the $act that 1e)re dealin+ 1ith three asic products' Your report on each product line)s costs last ,ear @see E/hi it ?A *akes it prett, clear that the (a#era+e. is 1a, out o$ line' 0o1 1ould the reak% e#en point look i$ 1e took this on an indi#idual product asisF Bill French: "ell! I)* not sure' It see*s to *e that there is onl, one reak%e#en point $or the $ir*' "hether 1e take it product , product or in total! 1e)#e +ot to hit that point' I)ll e +lad to check $or ,ou i$ ,ou 1ant! ut D

Exhibit ! Product Class Cost Anal sis$ %ormal &ear Aggregate

Sales at full capacit )units* Actual sales volume 1nit sales price 5otal sales revenue 8aria9le cost per unit 5otal varia9le cost Fi:ed costs Profit Ratios; 8aria9le cost to sales 1nit contri9ution to sales 1tili<ation of capacit +$,,,$,,, -$.,,$,,, 23.+, -,$6,,$,,, 0.., /$3.,$,,, +$43,$,,, -$,6,$,,, ,./+. ,.73. 3.=

'A(
/,,$,,, 2-,.,, /$,,,$,,, 3.., 0$.,,$,,, 4/,$,,, .0,$,,, ,.3. ,.+. 7,=

'B(
0,,$,,, 24.,, 7$/,,$,,, 7.3. -$.,,$,,, -$./,$,,, .0,$,,, ,.0+ ,..6 +,=

'C(
.,,$,,, 2+.0, -$+,,$,,, -.., 3.,$,,, 0.,$,,, , ,./+. ,.73. +.=

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Ray Bradshaw: =uess I *a, as 1ell +et in on this one! Bill' I$ ,ou)re +oin+ to do an,thin+ 1ith indi#idual products! ,ou ou+ht to kno1 that 1e)re lookin+ $or a i+ shi$t in our product *i/' The (A. line is reall, losin+ out! and I i*a+ine that 1e)ll e luck, to hold t1o%thirds o$ its #olu*e ne/t ,ear' "ouldn)t ,ou u, that! ArnieF @A+ree*ent $ro* the +eneral sales *ana+er'A That)s not too ad! thou+h! ecause 1e e/pect that 1e should pick up the 5::!::: that 1e lose! plus a out a 2uarter *illion units *ore! in (C. production' "e don)t see an,thin+ that sho1s *uch o$ a chan+e in (B.' That)s een solid $or ,ears and shouldn)t chan+e *uch no1' Arnie Winetki: Bradsha1)s called it a out as 1e $i+ure it! ut there)s so*ethin+ else here' "e)#e talked a out our pricin+ on (C. enou+h! and no1 I)* reall, +oin+ to push our side o$ it' Ra,)s esti*ate o$ *a, e hal$ a *illion units <7:!::: I +uess it 1as - increase on (C. $or ne/t ,ear is on the asis o$ dou lin+ the price 1ith no chan+e in cost' "e)#e een priced so lo1 on this ite* that it)s een a cri*e - 1e)#e +ot to raise it $or t1o reasons' First! $or our reputation4 the price is out o$ line 1ith other products in its class and is co*pletel, inconsistent 1ith our 2ualit, reputation' Second! i$ 1e don)t raise the price! 1e)ll e s1a*ped! and 1e can)t handle it' You heard 1hat "illia*s said a out capacit,' The 1a, the 1hole (C. $ield is e/plodin+ 1e)ll ha#e to deal 1ith another hal$%*illion units in unsatis$ied orders i$ 1e don)t 3ack the price up' "e can)t a$$ord to e/pand that *uch $or this product' At this point! Anne Fraser 1alked to1ard the $ront o$ the roo* $ro* 1here she had een standin+ near the rear door' The discussion roke $or a *inute! and she took ad#anta+e o$ the lull to inter3ect a $e1 co**ents'

Anne Fraser: This certainl, has een a help$ul discussion' As lon+ as ,ou)re +oin+ to tr, to +et all the thin+s to+ether $or ne/t ,ear! let)s see 1hat I can add to help ,ou4 Nu* er One4 Let)s re*e* er that e#er,thin+ that sho1s in the pro$it area here on Bill)s chart is di#ided al*ost e#enl, et1een the +o#ern*ent and us' No1! $or last ,ear 1e can read a pro$it o$ a out 8;::!:::' That)s ri+htC ut 1e 1ere le$t 1ith hal$ o$ that! and then paid out di#idends o$ 8?::!::: to the stockholders' Since 1e)#e +ot an anni#ersar, ,ear co*in+ up! 1e)d like to put out a special di#idend o$ a out 7: percent e/tra' "e ou+ht to retain 867:!::: in the usiness! too' This *eans that 1e)d like to hit 8>::!::: pro$it a$ter ta/es' Nu* er T1o4 Fro* 1here I sit! it looks as i$ 1e)re +oin+ to ha#e ne+otiations 1ith the union a+ain! and this ti*e it)s likel, to cost us' All the indications are - and this isn)t pu lic - that 1e *a, ha#e to *eet de*ands that 1ill oost our production costs - 1hat do ,ou call the* here! Bill #aria le costs - , 6: percent across the oard' This *a, kill the onus%di#idend plans! ut 1e)#e +ot to hold the line on past pro$its' This *eans that 1e can +i#e that *uch to the union onl, i$ 1e can *ake it in added re#enues' I +uess ,ou)d sa, that raises ,our reak%e#en point! Bill - and $or that one I)d consider the co*pan,)s pro$it to e a $i/ed cost' Nu* er Three4 Ga, e this is the ti*e to think a out s1itchin+ our product e*phasis' Arnie *a, kno1 etter than I 1hich o$ the products is *ore pro$ita le' You check *e out on this Arnie - and it *i+ht e a +ood idea $or ,ou and Bill to +et to+ether on this one! too' These $i+ures that I ha#e @E/hi it ?A *ake it look like the percenta+e contri ution on line (A. is the lo1est o$ the unch' I$ 1e)re losin+ #olu*e there as rapidl, as ,ou sales $olks sa,! and i$ 1e)re as hard pressed $or

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space as Fred has indicated! *a, e 1e)d e etter o$$ +ra in+ so*e o$ that i+ de*and $or (C. , shi$tin+ so*e o$ the assets $ro* (A. to (C.' Wes a!idson: Thanks! Anne' I sort o$ $i+ured that 1e)d 1ind up here as soon as Bill rou+ht out his charts' This is an approach that 1e)#e arel, touched on! ut! as ,ou can see! ,ou)#e all +ot ideas that ha#e to e *ade to $it here so*e1here' Let *e su++est this4 Bill! ,ou re1ork ,our chart and tr, to rin+ into it so*e o$ the points that 1ere *ade here toda,' I)ll see i$ I can su**ariHe 1hat e#er,one see*s to e lookin+ $or' First o$ all! I ha#e the idea that ,our presentation is ased on a rather i*portant series o$ assu*ptions' Gost o$ the 2uestions that 1ere raised 1ere reall, a out those assu*ptions' It *i+ht help us all i$ ,ou tr, to set the assu*ptions do1n in lack and 1hite so that 1e can see 3ust ho1 the, in$luence the anal,sis' Then! I think that Iohn 1ould like to see the unit sales increase $actored in! and

he)d also like to see 1hether there)s an, di$$erence i$ ,ou ase the calculations on an anal,sis o$ indi#idual product lines' Also! as Ra, su++ested! since the product *i/ is ound to chan+e! 1h, not see ho1 thin+s look i$ the shi$t *aterialiHes as he has $orecastF Arnie 1ould like to see the in$luence o$ a price increase in the (C. lineC Fred looks to1ard an increase in $i/ed *anu$acturin+ costs o$ 8>:!::: a *onthC and Anne has su++ested that 1e should consider ta/es! di#idends! e/pected union de*ands! and the 2uestion o$ product e*phasis' I think that ties it all to+ether' Let)s hold o$$ on our ne/t *eetin+ until Bill has had ti*e to 1ork so*e *ore on this' "ith that! the *eetin+ dis anded' French and Da#idson headed ack to their o$$ices and French! in a tone o$ concern! asked Da#idson! ("h, didn)t ,ou 1arn *e a out the hornet)s nest I 1as 1alkin+ intoF. (Bill! ,ou didn)t askE.

"#estions 1. What are the assumptions implicit in Bill Frenchs determination of his companys break-even point? 2. On the basis of Frenchs revised information !hat does ne"t year look like# a. What is the break-even point? b. What level of operations must be achieved to pay the e"tra dividend i$norin$ union demands? c. What level of operations must be achieved to meet the union demands i$norin$ bonus dividends? d. What level of operations must be achieved to meet both dividends and e"pected union re%uirements? &. 'alculate each of the three products break-even points usin$ the data in ("hibit &. Why is the sum of these three volumes not e%ual to the 1 1)) ))) units a$$re$ated break-even volume? *. +s this type of analysis of any value? For !hat can it be used?

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