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		108,000			216,000			310,000
Unit selling price	$	2.00		$	1.50		$	1.40
Variable expense per unit	$	.70		$	1.00		$	1.20

   

Total fixed expenses are $272,000 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 overall break-even point in dollar sales? (Round CM ratio to 4 decimal places and final answer to the nearest whole dollar.)

  

2. Of the total fixed expenses of $272,000, $38,870 could be avoided if the Velcro product is dropped, $83,000 if the Metal product is dropped, and $37,400 if the Nylon product is dropped. The remaining fixed expenses of $112,730 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.)

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		108,000			216,000			310,000
Unit selling price	$	2.00		$	1.50		$	1.40
Variable expense per unit	$	.70		$	1.00		$	1.20

   

Total fixed expenses are $272,000 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 overall break-even point in dollar sales? (Round CM ratio to 4 decimal places and final answer to the nearest whole dollar.)

  

2. Of the total fixed expenses of $272,000, $38,870 could be avoided if the Velcro product is dropped, $83,000 if the Metal product is dropped, and $37,400 if the Nylon product is dropped. The remaining fixed expenses of $112,730 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.)

Break-even point in unit sales: velcro, metal, nylon

   

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

Answer to Question 1:

Particulars	Velcro	Metal	Nylon	Total
No. of Units	108000	216000	310000
Selling Price p.u	$2	$1.50	$1.40
Variable Expenses p.u	$0.70	$1	$1.20
Total Sales	$216,000	$324,000	$434,000	$974,000
Less: Variable Expenses	$75,600	$216,000	$372,000	$663,600
Total Contribution	$140,400	$108,000	$62,000	$310,400
Less: Fixed Expenses				(272,000)
Profit				38,400

PV Ratio = Contribution / Sales * 100

= $3,10,400/ $9.74,000 *100

= 31.86%

Break Even Point (in $) = Total Fixed Cost / PV Ratio

= $2,72,000/ 31.86%

= $8,53,735.09

............................................................................................................................................................................

Answer to Question 2:

Particulars	Velcro	Metal	Nylon
Selling Price p.u	$2	$1.50	$1.40
Variable Expenses p.u	$0.70	$1	$1.20
a)Contribution Margin p.u	$1.30	$0.50	$0.20
b)Avoidable Fixed Cost	$38,870	$83,000	$37,400
BEP(Units)[b/a]	29900	166000	187000

Particulars	Velcro	Metal	Nylon
BEP(Units)[b/a]	29900	166000	187000
Selling Price p.u	$2	$1.50	$1.40
Variable Expenses p.u	$0.70	$1	$1.20
a)Contribution Margin p.u	$1.30	$0.50	$0.20
Total Contribution	$38,870	$83,000	$37,400
Less: Avoidable Fixed Cost	(38,870)	(83,000)	(37,400)
Profit	$0	$0	$0

Overall Profit of the Company at BreakEven Sales Level:

Particulars	Total
No. of Units	3,82,900
Selling Price p.u[$2+ $1.5+$1.4]	$4.90
Variable Expenses p.u	$2.90
Total Sales	$18,76,210
Less: Variable Expenses	$1,110,410
Total Contribution	$765,800
Less: Fixed Expenses	(272,000)
Overall Profit of the Company	$493,800