Question

Piedmont Fasteners Corporation makes three different clothing fasteners in its manufacturing facility in North Carolina. All three products are sold in highly competitive markets, so the company is unable to raise prices without losing an unacceptable number of customers. Data from the most recent period concerning these products appear below:

	Velcro			Metal			Nylon
Annual sales volume		100,200			200,400			400,800
Unit selling price	$	1.65		$	1.50		$	0.85
Variable expense per unit	$	1.25		$	0.70		$	0.25
Contribution margin per unit	$	0.40		$	0.80		$	0.60

Total fixed expenses are $400,800 per period. Of the total fixed expenses, $20,000 could be avoided if the Velcro product is dropped, $80,000 if the Metal product is dropped, and $60,000 if the Nylon product is dropped. The remaining fixed expenses of $240,800 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.

The company's managers would like to compute the break-even point in dollar sales for the company as a whole, and the break-even point in unit sales for each product. They are considering two methods for computing each product's break-even point unit sales:

Method #1: Include each product's traceable fixed costs and an allocated share of the common fixed costs in the numerator of each break-even calculation. The common fixed costs would be allocated to the three products using sales dollars as the allocation base.

Method #2: Only include each product's traceable fixed costs in the numerator of each break-even calculation.

Required:

1. Using data from the most recent period, prepare a contribution format segmented income statement.

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

3a. Calculate the break-even point in unit sales for each product using method 1.

3b. If the company sells exactly the break-even quantity of each product, what will be the overall profit for the company using method 1?

4a. Calculate the break-even point in unit sales for each product using method 2.

4b. If the company sells exactly the break-even quantity of each product, what will be the overall profit for the company using method 2?

5. Which method should the company use to calculate each product's break-even point in unit sales?

Answer 1

1	Contribution Format Income Statement
		Velcro	Metal	Nylon	Total
	Sales	$                     165,330	$                      300,600	$                340,680	$         806,610
	Less:Variable expenses	$                     125,250	$                      140,280	$                100,200	$         365,730
	Contribution Margin	$                       40,080	$                      160,320	$                240,480	$         440,880
	Less:Traceable Fixed Costs	$                       20,000	$                        80,000	$                  60,000	$         160,000
	Segment Margin	$                       20,080	$                        80,320	$                180,480	$         280,880
	Less:Common Fixed Costs				$         240,800
	Net Income				$           40,080
2	Contribution Margin ratio of company =$440,880 / $806,610 =54.658385093%
	Break-even Point in sales dollars =$400,800 / 54.658385093% =$733,282
3.a & 3.b		Velcro	Metal	Nylon
	Traceable Fixed Costs	$                       20,000	$                        80,000	$                  60,000
	Common Fixed Costs	$                       49,357	$                        89,739	$                101,704
	Total Fixed Costs	$                       69,357	$                      169,739	$                161,704
	Contribution Margin per unit	$                           0.40	$                            0.80	$                      0.60
	Break-even Point(in units)	173391	212174	269507
	Contribution Margin	$                       69,356	$                      169,739	$                161,704
	Less:Traceable Fixed Costs	$                       20,000	$                        80,000	$                  60,000
	Less:Common Fixed Costs	$                       49,357	$                        89,739	$                101,704
	Net Income	$                              -	$                                -	$                          -
	So overall Profit for the company will be NIL
4.a & 4.b		Velcro	Metal	Nylon
	Traceable Fixed Costs	$                       20,000	$                        80,000	$                  60,000
	Contribution Margin per unit	$                           0.20	$                            0.40	$                      0.15
	Break-even Point(in units)	100200	200400	400800
	Contribution Margin	$                       20,000	$                        80,000	$                  60,000
	Less:Traceable Fixed Costs	$                       20,000	$                        80,000	$                  60,000
	Net Income	$                              -	$                                -	$                          -
	So overall Profit for the company will be ($240,800)
	Company should use Method 1 to compute Break-even Point in unit sales