Question

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 118,000 207,000 292,000

Unit selling price   $1.80.   $1.50   $1.40

Variable expense per unit $0.70 $0.80   $1.10

Total fixed expenses are $262,000 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 $262,000, $28,050 could be avoided if the Gold product is dropped, $120,400 if the Silver product is dropped, and $58,800 if the Copper product is dropped. The remaining fixed expenses of $54,750 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

	Gold (a)	Silver (b)	Copper (c )	Overall Company (a+b+c)
Sales volume (a)	118,000	207,000	292,000	617,000
Selling Price per unit (b)	$1.80	$1.50	$1.40
Sales Revenue (a * b)	$212,400	$310,500	$408,800	$931,700
Less: Variable costs (118,000*$0.70); (207,000*$0.80); (292,000*$1.10)	($82,600)	($165,600)	($321,200)	($569,400)
Contribution Margin	$129,800	$144,900	$87,600	$362,300
Less: Traceable Fixed Expenses	($28,050)	($120,400)	($58,800)	($207,250)
Segment margin	$101,750	$24,500	$28,800	$155,050
Less: Common Fixed Expenses ($262,000 - $207,250)				($54,750)
Net Operating Income				$100,300
1)
Total Fixed Expenses (a)				$262,000
Contribution margin ratio ($362,600/$931,700*100) (b)				39%
Break-even point in sales dollars (a/b)				$673,766
2-a)
Treable Fixed Expenses (a)	$28,050	$120,400	$58,800
Contribution margin per unit ($1.80-$0.70); ($1.50-$0.80); ($1.40-$1.10) (b)	$1.10	$0.70	$0.30
Break-even point in sales units (a/b)	25,500	172,000	196,000
2-b)
Sales volume (a)	25,500	172,000	196,000	393,500
Selling Price per unit (b)	$1.80	$1.50	$1.40
Sales Revenue (a * b)	$45,900	$258,000	$274,400	$578,300
Less: Variable costs (25,500*$0.70); (172,000*$0.80); (196,000*$1.10)	($17,850)	($137,600)	($215,600)	($371,050)
Contribution Margin	$28,050	$120,400	$58,800	$207,250
Less: Traceable Fixed Expenses	($28,050)	($120,400)	($58,800)	($207,250)
Segment margin	$0	$0	$0	$0
Less: Common Fixed Expenses ($262,000 - $207,250)				($54,750)
Net Operating Income (loss)				($54,750)