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: Gold Silver Copper Annual sales volume 109,000 214,000 313,000 Unit selling price $ 1.80 $ 1.30 $ 0.80 Variable expense per unit $ 0.80 $ 0.70 $ 0.70 Total fixed expenses are $274,000 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 $274,000, $21,200 could be avoided if the Gold product is dropped, $96,600 if the Silver product is dropped, and $19,800 if the Copper product is dropped. The remaining fixed expenses of $136,400 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

Segmented Income Statement
	Total	Gold	Silver	Copper
Annual Sales Volume	636,000	109,000	214,000	313,000
Sales	724,800	196,200	278,200	250,400
Less: Variable Expenses	456,100	87,200	149,800	219,100
Contribution Margin	268,700	109,000	128,400	31,300
Less: Traceable Fixed Expenses	137,600	21,200	96,600	19,800
Segment Margin	131,100	87,800	31,800	11,500
Less: Common Fixed Expenses	136,400
Net Operating Income	(5,300)
Overall Contribution Margin ratio = Contribution Margin/Sales
=268700/724800
37.07230%
Overall Break even point = Fixed costs/Contribution Margin Ratio
739,096.39
Break even point in Units Sales = Fixed costs/Contribution Margin per unit
	Total	Gold	Silver	Copper
Contrubution Margin per unit	0.42248428	1	0.6	0.1
Avoidable Fixed costs		21,200	96,600	19,800
Break even Sales		21,200	161,000	198,000
Overall Profit = -$136,400 as common fixed costs will not be recovered at individual break even points