Anthony Albert Tiu

I. Synthesis
Bill French the accountant of Duo-Products Corporation has prepared reports for his presentation
regarding his analysis of the companys performance and status. French observed that each unit
contributed $2.70 to fixed costs after covering its variable cost. Given total fixed costs of $2,970,000,
he calculated that 1,100,000 units must be sold in order to break even. He verified this conclusion by
calculating dollar sales volume that was required to break even. Since the variable costs per unit
were 62.5% of selling price, French reasoned that 37.5% of every dollar sales was left available to
cover fixed cost. Thus, fixed costs of $2,970,000 required sales of $7,920,000 in order to break even.
French had prepared copies of his chart and supporting calculations for everyone at the meeting. He
explained carefully what he done and explained how the chart pointed to profitable year. It soon
became apparent that some of the participants had known in advance what French planned to
discuss, they had come to challenge him and take control of the meeting. John Cooper, the
production control manager is aiming to increase unit sales by 20% thus increasing its capacity up to
90% thus increasing its fixed cost by $60,000 a month. In addition, he points out that the charts
shown may not provide accurate data since it consist of having an average figures rather than
individual products. Also, Ray Bradshaw, the assistant sales manager suggested that the product
mix was bound to change and would like to see the influence of a price increase in the C line. Fred
looks toward an increase in fixed manufacturing costs of $60,000 a month. Anne, the administrative
assistant, question the product emphasis, tax inclusions, union demands and dividends .After
considering this scenario, Wes Davidson, Bill French Boss, decided to reset the meeting and rework
the charts for re-discussion.
II. Point of View

Bill French, accountant of Duo-Products Corporation

III. Statement of the Problem

What action should Bill French to project a higher profit after considering all the
assumptions made by his colleagues?

IV. Objective

To compute the break-even sales for a multi-products firm using cost behavior
information.

To use CVP in decision making

To set assumptions implied by the employees of Duo-Products Corporation

To analyze the individual products and see its differences in calculation

V. Areas of Consideration

Capacity of the plan to be increased by investment of $60,000 per month or around 720,000 per
year

Sales Price of C is to be increased by 100% (New Price = $4.80)

Sales volume of C is to be increase by 450,000 units (New Actual sales volume = 500,000+
450,00 =950,000)

Sales volume of A is reduced to 2/3 to 400,000 units

VI. Recommendation

One of the assumptions implied by Bill in his break-even chart indicates that the relevant range
will remain constant even there is an increased fixed cost due to an increase in volume capacity.
Another assumption that he overlooks consist of only one break-even points (average of 3
products) for the firm making the sales mix percentage of each product to be constant. Based
from assumptions on the areas to be considered, it has been found out that the profit will boost
by more than 100% if the investment to increase the sales volume of C by 450,000 will be price
at $4.80. After considering all the options and have compute for the break-even points of each
product, it has been proved that the contribution margin of summed products differs from the
new computed value due to the inclusion of sales mix ratio. From the scenario provided, the
production of Product A is scaled down but its level of fixed cost has been assumed to be
unchanged. To pay extra dividend of 50% and to retain the profit of $150,000, we need to have
a profit after taxes of $600,000. As half of the revenues go to the government taxes, the total
revenue should be equal to $1,200,000. Break even analysis can be used to decide whether to
alter the existing product or not. If we refer to last years data, we can see that it is not
economically feasible to manufacture product at a selling price of @ $2.40.
Therefore, after carrying out relevant cost-volume-profit analyses for companies with multiple
products, the management should maximize the sales of the product class with a higher
contribution margin, relative to other products. This can be done through an increase on its
production volume.

VII. Learning Points

The break-even analysis computed provides transparency to help the company analyze which
products that performs well and determine which product produces the highest profit with
minimal cost. It also helps us understand and formulate relationship between fixed and variable
cost output and evaluate items towards the versatility of its product cost.

The line by line analysis informs us about the virtual profitability for each product while the
aggregate analysis of product shows whether meeting the target profit is feasible. From a
financial point of view, aggregate type of analysis is useful to focus on its overall net profit
rather than on its operating profit. On the other hand, line product analysis focus to plan for
each product that it allows management to determine which products deserves to be reviewed
for evaluation. In some situational cases such as economic downturns, improving the sales of
product by manipulating the variable cost can used to endorse product sales






























Case Analysis Pricing Structure

Exhibit A: Existing Conditions


Plant Capacity (units) 2,000,000 per year
Total Fixed Cost ($) 2,970,000.00
Sales Volume (units) 1,500,000.00
Total Revenue 10,800,000.00
Capacity Utilization 0.75
Average Unit Price 7.20
Average Unit Variable
Cost 4.50
Average Unit Contribution
Margin Sales 0.375
Break Even sales Point S$ 7,920,000.00
Break Even sales (Units) 1,100,000.00

Exhibit B: Change in Product Structure (Areas of Consideration)
A B C Total
New Sales Volume 400,000.00 400,000.00 950,000.00 1,750,000.00
Sales Price (Ave) 10.00 9.00 4.80 6.94
Sales Revenue 4,000,000.00 3,600,000.00 4,560,000.00 12,160,000.00
Sales Mix ratio 0.23 0.23 0.54
Variable Cost 7.50 3.75 1.50 3.39
Variable Cost to Sales 0.75 0.42 0.31 0.49
Unit Contribution to Sales 0.25 0.58 0.69 0.51
Utilization of Capacity 0.20 0.20 0.48 0.88
Total Variable Cost 3,000,000.00 1,500,000.00 1,425,000.00 5,925,000.00
Fixed Cost 960,000.00 1,560,000.00 1,170,000.00 3,690,000.00
Profit 40,000.00 540,000.00 1,965,000.00 2,545,000.00
BEP (Unit) 384,000.00 297,142.86 354,545.45 1,035,688.31
BEP (Dollars) 3,840,000.00 2,674,285.71 1,701,818.18
CM Ratio 0.25 0.58 0.69 0.51
Contribution Margin 1,000,000.00 2,100,000.00 3,135,000.00
CM/unit 2.50 5.25 3.30 3.56


Exhibit C: Individual Break Even Analysis
A B C Total
Sales Volume 600,000.00 400,000.00 500,000.00 1,500,000.00
Sales Price 10.00 9.00 2.40 7.20
Sales Revenue 6,000,000.00 3,600,000.00 1,200,000.00 10,800,000.00
Variable Cost 7.50 3.50 1.50 4.50
Variable cost to Sales 0.75 0.42 0.63 0.63
Unit Contribution to
Sales 0.25 0.58 0.38 0.38
Utilization of Capacity 30.00 20.00 25.00 75.00
Total Variable Cost 4,500,000.00 1,500,000.00 750,000.00 6,750,000.00
Fixed Cost 960,000.00 1,560,000.00 450,000.00 2,970,000.00
Profit 540,000.00 540,000.00 0.00 1,080,000.00
BEP (unit) 384,000.00 297,142.00 500,000.00 1,100,000.00

Exhibit D: Analysis with versatile cost (Taxes , Dividends, expected union demands, question on
product emphasis)
What level of operations must be achieved
to pay the extra dividend , ignoring union
demands
Fixed Cost 3,690,000.00
Target Net Profit 1,200,000.00
Contribution Margin ( Sales - Variable cost) 3.55
6.94-3.39
Sales (units) = (Fixed + Targeted Net Profit) /
CM/unit
1,358,333.33
units


What level of operations must be achieved
to pay
extra dividend, ignoring union demands

Fixed Cost 3,690,000.00
Net Income 450,000
Taxes 450,000
Target Net Profit 900,000
Contribution Margin ( Sales - Variable cost) 3.22
6.94-3.39*1.1
Sales (units) = (Fixed + Targeted Net Profit) /
CM/unit
1,423,697.00
units

What level of operations must be achieved
to
meet both dividends and expected union
requirements
Fixed Cost 3,690,000.00
Target Net Profit 1,200,000.00
Contribution Margin ( Sales - Variable cost) 3.22
6.94-3.39*1.1
Sales (units) = (Fixed + Targeted Net Profit) /
CM/unit
1,516,749.00
units