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(bill french: p. 1/5)
Bill French picked up the phone and called
his boss, Wes Davidson, controller of Duo-
“Wes, I’m all set for
the meeting this afternoon.
together a set of break-even statements that
should really make people sit up and take
notice – and I think they’ll be able to
understand them, too.”
After a brief
conversation, French concluded the call and
turned to his charts for one last checkout
before the meeting.
French had been hired six months earlier as
a staff accountant.
He was directly
responsible to Davidson and had been
doing routine types of analytical work.
French was a business school graduate and
was considered by his associates to be quite
capable and unusually conscientious.
this later characteristic that had apparently
caused him to “rub some of the working
folks the wrong way,” as one of his
coworkers put it.
French was well aware of
his capabilities and took advantage of every
opportunity that arose to try to educate
those around him.
Davidson’s invitation for
French to attend an informal manager’s
meeting had come as a surprise to others in
the accounting group.
French requested permission to make a
presentation of some break-even data,
not been making use of this type of analysis
in its planning procedures.
Basically, what French had done was to
determine the level at which the company
must operate in order to break even.
The company must be able at least to
sell a sufficient volume of goods so that
it will cover all the variable costs of
producing and selling the goods.
Further, it will not make a profit unless
it covers the fixed costs as well.
level of operation at which total costs
are just covered is the break-even
This should be the lower limit
in all our planning.
The accounting records had provided the
following information that French used in
constructing his chart:
Plant capacity – 2 million units per year
Past year’s level of operations – 1.5 million
Average unit selling price - $7.20
Total fixed costs - $2,970,000
Average unit variable cost - $4.50
From this information French observed
that each unit contributed $2.70 to fixed
costs after covering its variable costs.
Given total fixed costs of $2,970,000, he
calculated that 1,100,000 units must be
sold in order to break even.
this conclusion by calculating the dollar
sales volume that was required to break
Since the variable costs per unit
were 62.5 percent of the selling price,
French reasoned that 37.5 percent of
every sales dollar was left available to
cover fixed costs.
Thus, fixed costs of
$2,970,000 required sales of $7,920,000 in
order to break even.
When he constructed a break-even chart,