Question

			velcro	metal	nylon
normal annual sales volume			105,000	214,000	287,000
unit selling proce			1.7	1.4	1.4
variable expense per unit			0.8	0.8	1.1

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 be listed above,

Total fixed expenses are $270,000 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 $270,000, $24,660 could be avoided if the Velcro product is dropped, $103,200 if the Metal product is dropped, and $55,800 if the Nylon product is dropped. The remaining fixed expenses of $86,340 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.)

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

Solution a:

Computation of Product wise and overall contribution margin ratio - Piedmont Fasteners Corporation
Particulars	Velcro	Metal	Nylon	Total
Sales units	105000	214000	287000
Selling price per unit	$1.70	$1.40	$1.40
Variable cost per unit	$0.80	$0.80	$1.10
Sales Revenue	$178,500.00	$299,600.00	$401,800.00	$879,900.00
Variable cost	$84,000.00	$171,200.00	$315,700.00	$570,900.00
Contribution	$94,500.00	$128,400.00	$86,100.00	$309,000.00
Contribution Margin Ratio	52.9412%	42.8571%	21.4286%	35.1176%

Overall breakeven point in dollar sales = Fixed cost / Weighted aveage contribution margin ratio

= $270,000 / 35.1176% = $768,845

Solution 2a:

Computation of Breakeven point of each product
Particulars	Velcro	Metal	Nylon
Selling price per unit	$1.70	$1.40	$1.40
Variable cost per unit	$0.80	$0.80	$1.10
Contribution per unit	$0.90	$0.60	$0.30
Fixed expenses related to each product	$24,660.00	$103,200.00	$55,800.00
Breakeven point (Sales Units) (Fixed Expenses / Contribution per unit)	27400	172000	186000

Solution 2b:

If the company sells exactly the break-even quantity of each product then company will recover on fixed cost related to individual product, therefore overall profit (loss) of the company = Net income of products - Common fixed expenses = 0 - $86,340 = ($86,340)