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	106,000		186,000		291,000
Unit selling price	$	1.50	$	1.10	$	0.80
Variable expense per unit	$	0.90	$	0.60	$	0.70

Total fixed expenses are $262,000 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 $262,000, $13,980 could be avoided if the Velcro product is dropped, $84,500 if the Metal product is dropped, and $19,100 if the Nylon product is dropped. The remaining fixed expenses of $144,420 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. Overall breakeven point
		Velcro	Metal	Nylon	TOTAL
	Annual sales volume	1,06,000	1,86,000	2,91,000
	Unit selling price	1.5	1.1	0.8
	Total sales volume	159000	204600	232800	596400
	Variable expense per unit	0.9	0.6	0.7
	Contribution per unit (Sale-variable cost)	0.6	0.5	0.1
	Total contribution (Sales volume x contribution per unit)	63600	93000	29100	185700
	Profit volume ratio (Contribution/Sales)				31.14%
	fixed cost				262000
	Breakeven sales (Fixed cost/PV ratio)				841447.50
2	a
		Velcro	Metal	Nylon	Common	TOTAL
	Annual sales volume	1,06,000	1,86,000	2,91,000
	Unit selling price	1.5	1.1	0.8
	Total sales volume	159000	204600	232800		596400
	Variable expense per unit	0.9	0.6	0.7
	Contribution per unit (Sale-variable cost)	0.6	0.5	0.1
	Total contribution (Sales volume x contribution per unit)	63600	93000	29100		185700
	Profit volume ratio (Contribution/Sales)	40.00%	45.45%	12.50%		31.14%
	fixed cost	13980	84500	19100	144420	262000
	Breakeven sales (Fixed cost/PV ratio)	34950	185900	152800
2	b
		Velcro	Metal	Nylon	TOTAL
	Breakeven sales	34950	185900	152800	373650
	Contribution (PV ratio x Sales)	13980	84500	19100	117580
	Less: Common fixed expenses				144420
	Profit/Loss				-26840