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	113,000		185,000		308,000
Unit selling price	$	1.70	$	1.50	$	1.70
Variable expense per unit	$	1.10	$	0.90	$	1.20

Total fixed expenses are $266,000 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 $266,000, $13,320 could be avoided if the Velcro product is dropped, $100,200 if the Metal product is dropped, and $99,000 if the Nylon product is dropped. The remaining fixed expenses of $53,480 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

SOLUTION

1.

	Velcro ($)	Metal ($)	Nylon ($)	Total ($)
Sales *	192,100	277,500	523,600	993,200
Variable Expense**	124,300	166,500	369,600	660,400
Contribution Margin	67,800	111,000	154,000	332,800
Fixed Expenses				266,000
Net Opearting Income				66,800

* Sales-

(113,000 * $1.70 = $192,100) , (185,000 * $1.50 = $277,500), (308,000 * $1.70 = $523,600)

**Variable Expense-

(113,000 * $1.10 = $124,300) , (185,000 * $0.90 = $166,500), (308,000 * $1.20 = $369,600)

Contribution margin ratio = Contribution margin / Sales

= 332,800 / 993,200 = 33.50%

Dollar sales to breakeven = Fixed Expenses / CM ratio

= $226,000 / 33.50%

= $674,627

2. A.

	Velcro ($)	Metal ($)	Nylon ($)
Unit selling price	1.70	1.50	1.70
Variable cost per unit	1.10	0.90	1.20
Unit contribution margin (a)	0.60	0.60	0.50
Product fixed expenses (b)	13,320	100,200	99,000
Unit sales to break even (b) / (a)	22,200	167,000	198,000

B.

	Velcro ($)	Metal ($)	Nylon ($)	Total ($)
Sales *	37,740	250,500	336,600	624,840
Variable Expense**	24,420	150,300	237,600	412,320
Contribution Margin	13,320	100,200	99,000	212,520
Fixed Expenses				266,000
Net Opearting Income				(53,480)

* Sales-

(22,200 * $1.70 = $37,740) , (167,000 * $1.50 = $250,500), (198,000 * $1.70 = $336,600)

**Variable Expense-

(22,200 * $1.10 = $24,420) , (167,000 * $0.90 = $150,300), (198,000 * $1.20 = $237,600)