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		219,000		290,000
Unit selling price	$	1.60	$	1.40	$	1.20
Variable expense per unit	$	0.80	$	0.80	$	0.70

Total fixed expenses are $267,000 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 overall break-even point in dollar sales?

2. Of the total fixed expenses of $267,000, $21,680 could be avoided if the Velcro product is dropped, $98,400 if the Metal product is dropped, and $94,500 if the Nylon product is dropped. The remaining fixed expenses of $52,420 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

1.

PARTICULARS	VELCRO	METAL	NYLON	TOTAL
Sales	187200	306600	348000	841800
Variable expenses	93600	175200	203000	471800
Contribution margin	93600	131400	145000	370000
Fixed expenses				267000
Net operating income				103000

PV Ratio = contribution / sales

                = 370000 / 841800 = 0.439

Break even sales ($) = fixed expenses / PV ratio = $ 267000 / 0.439 = $ 608200

2. (a)

PARTICULARS	VELCRO	METAL	NYLON
Unit selling price	$1.60	$1.40	$1.20
Variable expense per unit	$0.80	$0.80	$0.70
Contribution per unit	$0.80	$0.60	$0.50
Fixed expenses	$ 21680	$ 98400	$ 94500
BEP = Fixed cost / Cont. per unit	27100	164000	189000

(b) The company would lose $52,420—the amount of the common fixed cost. The verification and calculation is shown below:

PARTICULARS	VELCRO	METAL	NYLON	TOTAL
units	27100	164000	189000
Sales	43360	229600	226800	499760
Variable expenses	21680	131200	132300	285180
Contribution margin	21680	98400	94500	214580
Fixed expenses				267000
Net operating income				(52420)