Question

Cheryl Montoya picked up the phone and called her boss, Wes Chan, the vice president of marketing at Piedmont Fasteners Corporation: "Wes, I'm not sure how to go about answering the questions that came up at the meeting with the president yesterday." "What's the problem?" "The president wanted to know the break-even point for each of the company's products, but I am having trouble figuring them out." "I'm sure you can handle it, Cheryl. And, by the way, I need your analysis on my desk tomorrow morning at 8:00 sharp in time for the follow-up meeting at 9:00." Piedmont Fasteners Corporation makes three different clothing fasteners in its manufacturing facility in North Carolina. Data concerning these products appear below: Annual sales volume Unit selling price Variable expense per unit Velero 102,000 $1.70 $0.90 Metal 216,000 $1.70 $1.20 Nylon 312,000 $1.30 $1.10 Total fixed expenses are $257,000 per year. All three products are sold in highly competitive markets, so the company is unable to raise prices without losing an unacceptable numbers of customers. The company has an extremely effective lean production system, so there are no beginning or ending work in process or finished goods inventories. Required: 1. What is the company's over-all break-even point in dollar sales? 2. Of the total fixed expenses of $257,000, $19,600 could be avoided if the Velcro product is dropped, $79,500 if the Metal product is dropped, and $39,600 If the Nylon product is dropped. The remaining fixed expenses of $118,300 consist of common fixed expenses such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely. a. What is the break-even point in unit sales for each product? b. If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company? histrative salaries and product is dropped. The rewolded if the Velcro

Answer 1

Answer:

1. The overall break-even point in dollar sales are as follows :

	Velcro	Metal	Nylon	Total
Sales( Annual sales volume × unit selling price)	$173400	$367200	$405600	$946200
Variable Expenses ( Annual sales volume × variable Expenses per unit)	$91800	$259200	$343200	$694200
Contribution margin (sales - variable Expenses)	$81600	$108000	$62400	$252000
Fixed Expenses				$257000
Net operating income (contribution Margin - Fixed Expenses )				($5000)

To find a break even point in dollar sale,we first calculate the Contribution margin ratio -

Contribution Margin Ratio ( CM Ratio) = Total contribution Margin/ Total sales

CM ratio =$252000 / $946200 =0.266

Overall Break-even point in dollar sales = Fixed Expenses / CM Ratio

Overall Break-even point in dollar sales =$257000 / 0.266

Overall Break-even point in dollar sales= $966165

2.

a) The Break-even points in unit sales for each product are as follows :

	Velcro	Metal	Nylon
Unit selling price	$1.70	$1.70	$1.30
Variable cost per unit	$0.90	$1.20	$1.10
Contribution Margin in units (a)(unit selling price - variable cost per unit)	$0.80	$0.50	$0.20
Product fixed Expenses (b)	$19600	$79500	$39600
Break-even point in unit sales {(b) ÷ (a)}	$24500	$159000	$198000

b) If the company sells exactly the Break-even quantity of each product then the result were as follows:

	Velcro	Metal	Nylon	Total
Break-even point in unit sales	$24500	$159000	$198000	$381500
Sales ( Break-even point in unit sales × unit selling price)	$41650	$270300	$257400	$569350
Variable Expenses (Break-even po oint in unit sales × variable cost per unit )	$22050	$190800	$217800	$430650
Contribution Margin (sales - variable Expenses)	$19600	$79500	$39600	$138700
Fixed Expenses				$257000
Net operating income/ (loss) ( contribution Margin - Fixed Expenses)				($118300)

If company sells exactly the Break-even quantity of each product then company suffers from loss of $ 118,300