Question

Susan Lo picked up the phone and called her boss, Phil Takata, the vice president of marketing at Jewel Clasps Corporation: “Phil, 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, Susan. 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.” Jewel Clasps Corporation makes three different types of jewelry clasps in its manufacturing facility in North Carolina. Data concerning these products appear below:

Annual sales volume	116,000		208,000		288,000
Unit selling price	$	1.40	$	1.90	$	1.30
Variable expense per unit	$	0.70	$	1.20	$	1.00

Total fixed expenses are $266,000 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.

**TIP: To answer the questions below, it will be most helpful if you prepare segmented income statements as illustrated in your textbook

Required:

1. What is the company’s over-all break-even point in dollar sales?

2. Of the total fixed expenses of $266,000, $15,820 could be avoided if the Gold product is dropped, $119,700 if the Silver product is dropped, and $59,400 if the Copper product is dropped. The remaining fixed expenses of $71,080 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) Total annual demand = 116,000+208,000+288,000=612,000

Overall breakeven point = Total fixed expense / Weighted average selling price - Weighted average variable expense

Weighted average selling price = (Gold product selling price * Sales percentage of gold product)+(Silver product selling price * Sales percentage of Silver product)+(Copper selling price * Sales percentage of Copper)

= $1.4 *116,000/612,000 + $1.90 *208,000/612,000+$1.30 *288,000/612,000

=$0.265+0.646+0.612

=$1.523

Weighted average Variable expense = (Gold product Variable expense * Sales percentage of gold product)+(Silver product Variable expense * Sales percentage of Silver product)+(Copper variable expense * Sales percentage of Copper)

=$0.70*116,000/612,000 + $1.2 *208,000/612,000+$1 *288,000/612,000

=$1.01

Break even point in units = $266,000/$1.523-1.01 = 518,519 Units

Product Gold = 518,519 *116,000/612,000 = 98,281 Units

Product Silver =518,519*208,000/612,000= 176,229 Units

Product copper = 518,519 *288,000/612,000= 244,009 Units

Breakeven point in dollars = 98,281 Units *$1.40 + 176,229*$1.90 + 244,009*$1.30 = $789,640

2) a) total breakeven units = $71,080/$1.523-1.01 = 138,558Units

Product Gold breakeven point in units = 138,558 * 116,000/612,000 = 26,263 Units

Product silver break even point inunits = 138,558 * 208,000/612,000 =47,092 Units

Product Copper breackeven point in units =138,558 *288,000/612,000 = 65,204 Units

b) At break even company won't get profit after breakeven point. But in case of avoidable fixed cost are there, So there might be profit at overall company level.

Profit =(98,281 Units - 26,263 ) *(1.40-0.70)+(176,229 - 47,092) *(1.90-1.20) +(244,009 -65,204)*($1.30-1)

=$194,450