Question

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Piedmont Fasteners Corporation makes three different clothing fasteners in its manufacturing facility in North Carolina. All...

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?

Solutions

Expert Solution

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

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