Strategic cost analysis &

management:

Case Study
Bill French Accountant
Takeaways

Bill French, aggregated BEP

basic+ + dividend
basic basic+ dividend
union + 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, line-by-line BEP
basic basic+ union
Sales volume at
aggregated BEP 1 076 406 1 189 275
170 000/0,42= 170 000/0,30 =
BEP A (in units) 404 762 576 271
275 000/0,88 = 275 000 / 0,81 =
BEP B (in units) 314 286 338 462
195 000/0,55 = 195 000/0,53 =
BEP C (in units) 354 545 371 429

Bill French, aggregated CVP

calculations
+dividend +
basic + dividend + union 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
 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 BEP
„ An 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.
 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 UCM
„ BEP ($) = 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
 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 forecast
financial needs.

CVP analysis is not for

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

„ Basic UCMs usually do not tell us which

products should be pushed
„ Contrary to UCMs, unit contribution margins
per unit of scarce resource are not misleading
„ UCMs 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 can

meet 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.