Question

9.

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	120,000		203,000		319,000
Unit selling price	$	1.50	$	1.30	$	1.20
Variable expense per unit	$	1.00	$	0.70	$	1.00

Total fixed expenses are $267,000 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 $267,000, $10,550 could be avoided if the Velcro product is dropped, $100,800 if the Metal product is dropped, and $40,600 if the Nylon product is dropped. The remaining fixed expenses of $115,050 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

	Velcro	Metal	Nylon	Total
Annual sales volume	120,000	203,000	319,000	642,000
Unit selling price	1.50	1.30	1.20
Total Sales	180,000.00	263,900.00	382,800.00	826,700.00
Variable expense per unit	1.00	0.70	1.00
Variable expense	120,000.00	142,100.00	319,000.00	581,100.00
Contribution	60,000.00	121,800.00	63,800.00	245,600.00
Contribution Margin Ratio				29.71%
Total Fixed Expenses	267,000.00
Breakeven Point in Sales Dollar	Total Fixed Expenses/Contribution Margin Ratio
Breakeven Point in Sales Dollar	267000/29.71%
Breakeven Point in Sales Dollar	898,687.31

	Velcro	Metal	Nylon
Annual sales volume	120,000	203,000	319,000
Unit selling price	1.50	1.30	1.20
Total Sales	180,000.00	263,900.00	382,800.00
Variable expense per unit	1.00	0.70	1.00
Variable expense	120,000.00	142,100.00	319,000.00
Contribution	60,000.00	121,800.00	63,800.00
Total Fixed Expenses	10,550.00	100,800.00	40,600.00
Contribution per Unit	0.50	0.60	0.20
Breakeven Point in Units	21,100	168,000	203,000

	Velcro	Metal	Nylon	Total
Annual sales volume	21,100	168,000	203,000	392,100
Unit selling price	1.50	1.30	1.20
Total Sales	31,650.00	218,400.00	243,600.00	493,650.00
Variable expense per unit	1.00	0.70	1.00
Variable expense	21,100.00	117,600.00	203,000.00	341,700.00
Contribution	10,550.00	100,800.00	40,600.00	151,950.00
Total Fixed Expenses				267,000.00
Profit (Loss)				(115,050.00)

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