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: Velcro Metal Nylon Annual sales volume 117,000 203,000 300,000 Unit selling price $ 2.20 $ 1.50 $ 0.60 Variable expense per unit $ 0.80 $ 0.80 $ 0.50 Total fixed expenses are $263,000 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 $263,000, $29,960 could be avoided if the Velcro product is dropped, $111,300 if the Metal product is dropped, and $20,200 if the Nylon product is dropped. The remaining fixed expenses of $101,540 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?

Answer 1

	Velcro	Metal	Nylon	Total
Sales Volume	117000	203000	300000	620000
Unit Selling price	2.2	1.5	0.6
Variable expense per unit	0.8	0.8	0.5
Contribution margin per unit	1.4	0.7	0.1
Total contribution margin	163800	142100	30000	335900
Total Sales	257400	304500	180000	741900
Overall CM Ratio				45.2756%
Total fixed expenses				263000
a.Overall break even point in Dollar Sales = Fixed costs/Overall CM Ratio	580,886.28
b.Break even point = Traceable fixed expenses/CM per unit
Velcro	21,400	units
Metal	159,000	units
Nylon	202,000	units
c.Overall profit = 0-Unallocated cost
i.e. -$101540
loss

в Velcro 117000 2.2 0.8 A 1 2 Sales Volume 3 Unit Selling price 4 Variable expense per unit 5 Contribution margin per unit 6 Total contribution margin 7 Total Sales 8 Overall CM Ratio 9 Total fixed expenses 10 11 a. Overall break even point in Dollar Sales - Fixed costs/Overall CM Ratio с D E Metal Nylon Total 203000 300000 =B2+C2+D2 1.5 0.6 0.8 0.5 =C3-C4 =D3-D4 =C2*C5 =D2*D5 =B6+C6+D6 =C2*C3 =D2*D3 =B7+C7+D7 =E6/E7 263000 =B3-B4 =B2*B5 =B2*B3 =E9/E8 12 =29960/B5 units =111300/C5 units =20200/D5 units 13 b.Break even point = Traceable fixed expenses/CM per unit 14 Velcro 15 Metal 16 Nylon 17 18 c. Overall profit = 0-Unalloacted cost 19 i.e. -$101540 20 loss