Bill French Case

:.~

~

-

Harvard Business School

9-1 04-039
Rev. January

30, 1987

Sill French, Accountant
Bill French picked Up the phone and called his boss, Wes Davidson, controller of DuoProducts Corporation: "Say, Wes, I'm a11set for the meeting this afternoon. I've put together a set of break-even statements that should rea11ymake the boys sit up and take notice-and 1think they'll be ableto understand them, too." After a brief conversation about other matters, the ca11was conc1uded and French 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, up to the time of this case, he had been doing routine types of analysis work. French was an alumnus of a liberal artsundergraduate school and a graduate business school, and he was considered to be quite capable and unusua11y conscientious by his associates, It was this latter characteristic that had apparently caused him to "rub some of the working guys the wrong way," as one of his co-workers put it. French was we11aware of his capabilities and took advantage of every opportunity to try to educate those aroundhim. Wes Davidson's invitation for French to attend an informal manager's meeting had come as a surprise to others in the accounting group. When French requested permission to make a presentation of some break-even data, Davidson agreed. The DuoProducts Corporation had not made use of this type of analysis before in its review or planning programs. Basically, what French had done was to determinethe level at which the company must operate in order to break even. As he phrased it: "The company must be able to at least sell a sufficient volume of goods so that it will cover a11of the variable costs of producing and selling the goods; further, it will not make a profit unless it covers the fixed, or nonvariable, costs as well. The level of operation at wh~ch total costs that is, variableplus nonvariable are just covered is the breakeven volume. This should be the lower limit in a11of our planning." The accounting records provided the fo11owinginformation that French used in constructing his chart:
Plant capacity Past year's level of operations Average unit selling price Total fixed costs Average variable unit cost 2,000,000 units 1,500,000 units $1.20 $520,000 $0.75

From thisinformation, he observed that each unit contributed $0.45 fixed overhead after covering to the variable costs. Given total fixed costs of $520,000, he calculated that 1,155,556units must be sold
This case was prepared as the basis for c1ass discussion rather than to illustrate either effectíve al' íneffective handling of an. . admínistratíve situatíon.

Copyright @ 1959 by the President andFellows of Harvard College. To order copies or request permission to reproduce materia1s, call1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmítted in any form or byany means-electronic, mechanícal, photocopying, recording, orotherwise-without the permission of Harvard Business School. 1

104-039

Sil! French, Accountant

in order required reasoned $520,000

to. break even. He verified this conc1usion by calculating the dollar sales volume that was to, break even. Since the variable costs per upit were 62.5% of the selling price, French that37.5% of every sales dallar was left available to cover fixed costs.Thus, fixed cos15 of require sales of $1,386,667 in order to break even.

When he constructed a break-even chart to present the information graphically, his conc1usions were further verified. The chart also made it c1ear that the firm was operating at a fair margin over the break-even requirements, and that the profits accruing (at arate of 37.5% of every sales do llar over break even) increased...