Question

4W Manufacturing Company

Dana Garcia dialed her boss on her cellphone from Wisconsin. Her boss Wu Chang, the president of marketing at 4W Manufacturing Corporation: “Wu, I’m not sure how to go about answering the questions that came up at the meeting with the CEO, Leanna McKenna yesterday.”

"What's the problem?"

“The Leanna wanted to know the break-even point for each of our products, but I am not sure how to do that, I am hacving trouble figuring them out.”

“I’m sure you can handle it, Dana. Oh, and, by the way, I need your analysis on my desk tomorrow morning at 8:00 a.m. sharp. I need it in time for the follow-up meeting at 9:00 a.m.”

4W Manufacturing Company makes three different fasteners for various uses such as hanging pictures, for clothes and other applications. The fasteners are made in its manufacturing facility in Sheboygan. Dana was given information concerning these products appear below:

	Velcro		Metal		Nylon
Annual sales volume	100,000		219,000		313,000
Unit selling price	$	2.20	$	2.10	$	1.30
Variable expense per unit	$	1.00	$	1.30	$	0.90

Total fixed expenses are $259,000 per year, of which 107,000 are unavoidable.

Additionally, Dana is told that 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 $259,000, $34,800 could be avoided if the Velcro product is dropped, $128,800 if the Metal product is dropped, and $77,200 if the Nylon product is dropped. The remaining fixed expenses of $18,200 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?

3. Wu has asked you to allocate fixed expenses. Discuss various ways you might allocate fixed expenses regardless of the availability of information. Include in your discussion avoidable vs unavoidable fixed costs. Choose the best method from the latter and allocate fixed expenses.

4. Leanna has indicated she might be willing to eliminate one of the products. Specifically, she has indicated that she believes Nylon is not profitable. Based on your allocation of 3 above, demonstrate with computations what impact eliminating Nylon would have on the financials of 4W. Explain why Leanna is correct/incorrect in her assumption.

5. Dana did some additional analysis and has determined that nylon sales would decline by 40% if they created a Super Nylon Product, but that the nylon product would offset that decline with sales of 87,000. This product would require additional variable costs of $0.40, but could be sold for $1.90. Additionally, 4W would have to spend $31,000 in fixed costs. Based on your allocation method in 3 above, is it profitable to do the additional processing (Include in your analysis the profitability for Nylon)? What price would you suggest to ensure profitability?

Answer 1

1).

On the basis of Annual sales units, it can be said that on 100 units of Velcro, 219 units of Metal and 313 units of Nylon will be sold. Let the units be x, 2.19x and 3.13x of Velcro, Metal and Nylon respectively.
Total Contribution is = $1.2 * x * 1 + $0.80 * y* 2.19 + $0.40 * z * 3.13
= 1.2x + 1.752x + 1.252x
For Breakeven, Contribution = Fixed Cost
4.204x = $259000
x= 61608 units means
For Breakeven 61608 units of Velcro, 134922 units of Metal and 192833 units of Nylon are required to be sold. (Figures are rounded off ).

2).
a).

b).

3). Fixed expenses can be allocated on the basis of sales or on the basis of identifiable fixed costs. I think best method to allocate on the basis of identifiable fixed cost related to product and if anything remains which cannot be identifiable that part must be allocated on the basis of revenue generation so that product does show losses on their side.

4). Cont. per unit of Nylon product is minimum against other products but it cannot be said on the basis of this observation. As if 1 unit of Velcro is sold , 2.19 units if Metal is sold and 3.13 units of Nylon is sold, if we check on this basis, contribution per unit of these products are:
Velcro = $1.2 * 1 =$1.2
Metal = $0.80 * 2.19 = $1.752
Nylon = $0.40 * 3.13 = $1.252
Hence on the basis of above calculations, Leanna's assumption is not fully correct.