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Case 16-3

In: Business and Management

Submitted By marigold
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Case 16-3: Bill French Note: This case is unchanged from the Eleventh Edition. Approach This case requires quite a few calculations, but it is a good case for introducing students to the uses and limitations of break-even analysis. It can be used to discuss many of the hidden assumptions involved in such an approach. Some instructors also find it a good vehicle for discussing some of the human problems arising when a young, well-educated person begins working in a business. Finally, at The University of Michigan we have found it useful to defer this case until Chapter 26, when we teach several cases on linear programming: Bill French can be used as an introductory case to raise the issue of what product mix is optimal given resource and/or sales volume constraints. Comments on Questions Question 1 There is undoubtedly a long list of assumptions that can be related to this, or any, break-even analysis. Part of the problem of dealing with analyses of this sort is that they take on the characteristic of being static even though the form of presentation might lead one to believe that here is a moving, dynamic analysis that allows for a variety of changed conditions. To an extent this is true; but there are many conditions that are assumed to be constant. It is to the assumed constants that the students must ultimately direct their attention. For instance: 1. French has had to assume that the variability of the variable costs is constant. French has thus assumed a relatively constant level of efficiency for machines and direct labor over all portions of the range of operations. Whether or not this is a valid assumption in a practical sense is highly questionable. 2. Similarly, there is an assumption that the fixed costs are truly fixed over the full range of operations that has been pictured. In fact, some fixed costs are likely to be step functions over this range. 3.…...

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