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Strategic cost analysis & management: Case Study Bill French Accountant Takeaways Bill French, aggregated BEP basic basic+ dividend basic+ union + dividend + union Sales volume 1 076 406 1 328 688 1 189 275 1 470 093 Unit sales price 1,159 1,159 1,159 1,159 (+) Sales revenue 1 247 400 1 539 760 1 378 200 1 701 216 Unit var. cost 0,56 0,56 0,62 0,62 (-) Total VC 607 401 749 760 738 200 911 216 (=) Contribution margin 640 000 790 000 640 000 790 000 (-) Fixed cost 640 000 640 000 640 000 640 000 (=) Operating profit 0 150 000 0 150 000 (-) Taxes 0 75 000 0 75 000 (=) Net Profit after taxes 0 75 000 0 75 000 Dividends 0 75 000 0 75 000 (=) Net Profit 0 0 0 0

Bill French

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Page 1: Bill French

Strategic cost analysis & management:

Case StudyBill French Accountant

Takeaways

Bill French, aggregated BEPbasic basic+ dividend

basic+ union

+ dividend + union

Sales volume 1 076 406 1 328 688 1 189 275 1 470 093

Unit sales price 1,159 1,159 1,159 1,159(+) Sales revenue 1 247 400 1 539 760 1 378 200 1 701 216

Unit var. cost 0,56 0,56 0,62 0,62

(-) Total VC 607 401 749 760 738 200 911 216 (=) Contribution margin 640 000 790 000 640 000 790 000

(-) Fixed cost 640 000 640 000 640 000 640 000 (=) Operating profit 0 150 000 0 150 000

(-) Taxes 0 75 000 0 75 000 (=) Net Profit after taxes 0 75 000 0 75 000

Dividends 0 75 000 0 75 000 (=) Net Profit 0 0 0 0

Page 2: Bill French

Bill French, line-by-line BEP basic basic+ union

Sales volume at aggregated BEP 1 076 406 1 189 275

BEP A (in units)170 000/0,42= 404 762

170 000/0,30 = 576 271

BEP B (in units)275 000/0,88 = 314 286

275 000 / 0,81 = 338 462

BEP C (in units)195 000/0,55 = 354 545

195 000/0,53 = 371 429

basic + dividend + union +dividend +

union

Sales volume 1 160 500 1 412 783 1 282 188 1 560 924

Unit sales price 1,159 1,159 1,159 1,159(+) Sales revenue 1 344 854 1 637 214 1 485 873 1 808 888

Unit var. cost 0,56 0,56 0,62 0,62

(-) Total VC 654 854 797 213 795 872 968 888 (=) Contribution margin 690 000 840 000 690 000 840 000

(-) Fixed cost 640 000 640 000 640 000 640 000 (=) Operating profit 50 000 200 000 50 000 200 000

(-) Taxes 25 000 100 000 25 000 100 000 (=) Net Profit after taxes 25 000 100 000 25 000 100 000

Dividends 0 75 000 0 75 000 (=) Net Profit 25 000 25 000 25 000 25 000

Bill French, aggregated CVP calculations

Page 3: Bill French

Learning Objective 1

Using cost behavior information to compute an organization breakeven sales level for a multi-products firm

CVP analysis for Multiple Products

BEPagregated ≠ BEPP1+BEPP2+BEPP3

Many sales combinations leading to the BEPAn extension of basic CVP analysis allows to continue to use its basic profit equation and graphing techniques by developing a weighted average product (‘the super product’) based on the estimated sales mix.This breakeven calculation will remain valid as long as the sales mix remains constant.

Page 4: Bill French

How to compute BEP in multi-production contexts

Define the assumed sales mix (P1 % of total sales, P2 % of total sales, P3 % of total sales)Calculate the weighted unit contribution margin (%salesP1 x UCMP1)+ (%salesP2 x UCMP2)+ (%salesP3 x UCMP3)BEP (unit) = Total FC ÷ weighted UCMBEP ($) = Total FC ÷ weighted UCM rate

!!! Weighted UCM rate = weighted UCM ÷ weighted turnover (and NOT weighted (UCM ÷ turnover))

Learning Objective 2

Using CVP in decision-making

Page 5: Bill French

The use of break-even analysis

BEP gives a measure of risk, not of profitability.BEP enables to assess the degree of risk of a company’s cost structure.A planning tool, useful to forecastfinancial needs.

CVP analysis is not for “discontinuing” decisions… a negative/positive UCM is not the onlyrelevant criteria to decide whether or not to drop a product.CVP analysis is insufficient for discontinuingdecisions (outsourcing, change in the productportfolio, …):Need to know the nature of fixed costs(direct/indirect)What are direct –avoidable- versus indirect –largely unavoidable- costs?

Page 6: Bill French

CVP analysis is not for comparing products

Basic UCMs usually do not tell us which products should be pushedContrary to UCMs, unit contribution margins per unit of scarce resource are not misleadingUCMs may be used when all products have the same scarce resource’s consumption.

Line-by-line versus aggregate analysis

Line-by- line analysis tells us about virtual profitability for each product. From manufacturing and sales point of view, it is very useful to make planning for each product.

Aggregate analysis answers whether we canmeet our profit targets.From the financial point of view, it is very useful to target the aggregate profit level.Focus on net profit rather than operating profit.