Question

Number 1: Susan Lo picked up the phone and called her boss, Phil Takata, the vice president of marketing at Jewel Clasps Corporation: “Phil, 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, Susan. 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.”

Jewel Clasps Corporation makes three different types of jewelry clasps in its manufacturing facility in North Carolina. Data concerning these products appear below:

	Gold		Silver		Copper
Annual sales volume	96,000		202,000		303,000
Unit selling price	$	2.20	$	1.40	$	0.90
Variable expense per unit	$	0.70	$	0.90	$	0.40

Total fixed expenses are $274,000 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.

**TIP: To answer the questions below, it will be most helpful if you prepare segmented income statements as illustrated in your textbook

Required:

1. What is the company’s over-all break-even point in dollar sales?

2. Of the total fixed expenses of $274,000, $38,400 could be avoided if the Gold product is dropped, $83,500 if the Silver product is dropped, and $95,000 if the Copper product is dropped. The remaining fixed expenses of $57,100 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?

Number 2

In Part 2 (b) of the previous question, you calculated a profit or loss if Jewel Clasps sells exactly the break-even quantity of each of its three products. What is the primary reason for the result you obtained in Part 2 (b) of the Jewel Clasps case?

Multiple Choice

• When a company sells at the segment level break-even point, its sales are not high enough to cover (pay for) its common fixed expenses.

• Selling at the segment level break-even point means that the company is able to cover (pay for) all of its fixed expenses, no matter whether they are traceable or common.

• When a company sells at the segment level break-even point, its sales are not high enough to cover (pay for) its traceable fixed expenses.

• When a company sells at the segment level break-even point, its sales are not high enough to cover (pay for) its variable expenses.

Number 3

KM MC: Should a company allocate common fixed expenses

Which of the following statements is true? There may be more than one answer:

Possible answers:

1. A segment's contribution margin minus its traceable fixed expenses equals the segment margin.
2. Allocating a portion of common fixed costs to a segments real costs may make an otherwise profitable segment appear to be unprofitable.
3. A company's common fixed costs should be evenly allocated to business segments when computing the dollar sales for a segment to break break even.
4. A segment's traceable fixed costs should include only those costs that will disappear over time if the segment disappears.

Multiple Choice

• The true statements are: #1, #2, and #4.

• The true statements are: #1, #2, #3, and #4.

• The true statements are: #1 and #2.

Answer 1

1. Company's overall break-even point in dollar sales = [$ 274,000 / $ 396,500 ] * 766,700 = $ 529,825.47

Contribution Margin Income Statement
	Gold	Silver	Copper	Total
Annual Sales Volume	96,000	202,000	303,000
Unit Selling Price	$ 2.20	$ 1.40	$ 0.90
Sales Revenue	$ 211,200	$ 282,800	$ 272,700	$ 766,700
Variable Expenses	67,200	181,800	121,200	370,200
Contribution Margin	144,000	101,000	151,500	396,500
Fixed Expenses				274,000
Net Income				122,500

2. a. Break-even point in unit sales = Avoidable fixed cost / Unit Contribution Margin.

	Gold	Silver	Copper
Avoidable Fixed Expenses	$ 38,400	$ 83,500	$ 95,000
Unit Contribution Margin	$ 1.50	$ 0.50	$ 0.50
Break-even point in unit sales	25,600	167,000	190,000

b. Overall profit for the company = [ ( 25,600 x 1.50 + 167,000 x 0.50 + 190,000 x 0.50 ] - $ 57,100 = $ 159,800.

Number 2 :

Selling at the segment level break-even point means that the company is able to cover (pay for) all of its fixed expenses, no matter whether they are traceable or common.

Number 3 :

The true statements are: #1, #2, and #4.