Question

“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	119,000		210,000		309,000
Unit selling price	$	2.00	$	1.80	$	1.20
Variable expense per unit	$	1.00	$	1.20	$	1.00

Total fixed expenses are $258,000 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 over-all break-even point in dollar sales?

2. Of the total fixed expenses of $258,000, $25,800 could be avoided if the Velcro product is dropped, $95,400 if the Metal product is dropped, and $38,000 if the Nylon product is dropped. The remaining fixed expenses of $98,800 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.

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

	Velcro	Metal	Nylon	Total
Sales	$238,000 (119,000*$2)	$378,000 (210,000*$1.80)	$370,800 (309,000*$1.20)	$986,800
Variable expense	-119,000 (119,000*$1)	-252,000 (210,000*$1.20)	-309,000 (309,000*$1)	-680,000
Contribution margin	$119,000	$126,000	$61,800	$306,800

1.

Overall break even point in dollars = Fixed cost / Contribution ratio

Overall break even point in dollars = $258,000 / 31.09% (306,800/986,800*100)

Overall break even point in dollars = $829,849

2.

a. Break even point in unit sales = Fixed cost / Contribution per unit

Velcro = $25,800 / $1 = 25,800 units

Metal = $95,400 / $0.6 = 159,000 units

Nylon = $38,000 / $0.20 = 190,000 units

b. Overall profit of the company = Total contribution margin - Fixed cost

Overall profit of the company = [$25,800(25,800*$1)+95,400(159,000*$0.6)+38,000(190,000*$0.20)] - $258,000

Overall profit of the company = $159,200 - 258,000

Overall loss of the company = -$98,800