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
Normal annual sales volume	104,000	205,000	404,000
Unit selling price	$1.30	$1.50	$1.05
Variable expense per unit	$.91	$.60	$0.42

   

Total fixed expenses are $432,000 per year.

All three products are sold in highly competitive markets, so the company is unable to raise its prices without losing 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 over-all break-even point in dollar sales? (Round CM ratio to 4 decimal places and final answer to the nearest thousand dollars.)

     

  

2.

Of the total fixed expenses of $432,000, $21,060 could be avoided if the Velcro product is dropped, $93,600 if the Metal product is dropped, and $65,520 if the Nylon product is dropped. The remaining fixed expenses of $251,820 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? (Do not round intermediate calculations.)

       

   

b.	If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company? (Do not round intermediate calculations.)

       

Answer 1

SOLUTION

1. Contribution margin = (Sales price - Variable cost) * No. of units

Velcro-

Contribution margin = ($1.30 - $0.91) * 104,000 = $40,560

Metal-

Contribution margin = ($1.50 - $0.60) * 205,000 = $184,500

Nylon-

Contribution margin = ($1.05 - $0.42) * 404,000 = $254,520

Overall contribution = $40,560 + $184,500 +$254,520 = $479,580

Sales = (1.30*104,000) + (1.50*205,000) + (1.05*404,000)

= $866,900

Contribution margin ratio = Overall contrbution / Sales

= $479,580 / $866,900 = 55.3213%

Dollar sales to breakeven = Fixed expenses / Contribution margin ratio

= $432,000 / 55.3213% = $780,893

2A.

Particulars	Velcro ($)	Metal ($)	Nylon ($)
Unit selling price	1.30	1.50	1.05
Variable cost per unit	0.91	0.60	0.42
Unit contribution margin (a)	0.39	0.90	0.63
Product fixed expenses (b)	21,060	93,600	65,520
Units sales to breakeven (b/a)	54,000	104,000	104,000

2B. Contribution margin = (Sales price - Variable cost) * No. of units

Velcro-

Contribution margin = ($1.30 - $0.91) * 54,000 = $21,060

Metal-

Contribution margin = ($1.50 - $0.60) * 104,000 = $93,600

Nylon-

Contribution margin = ($1.05 - $0.42) * 104,000 = $65,520

Overall contribution = $21,060 + $93,600 + $65,520 = $180,180

Net operating loss = Overall contribution - Fixed expenses

= $180,180 - $432,000 = 251,820