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	95,000		191,000		302,000
Unit selling price	$	1.30	$	1.90	$	1.20
Variable expense per unit	$	0.70	$	1.20	$	0.90

Total fixed expenses are $269,000 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 $269,000, $14,160 could be avoided if the Velcro product is dropped, $119,700 if the Metal product is dropped, and $60,900 if the Nylon product is dropped. The remaining fixed expenses of $74,240 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

SEGMENT-WISE INCOME STATEMENT
				TOTAL	VELCRO	METAL	NYLON
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				848,800	123,500	362,900	362,400
Less: Variable cost				567,500	66,500	229,200	271,800
Contribution margin				281,300	57,000	133,700	90,600
Less: Traceable fixed cost				194,760	14,160	119,700	60,900
SEGMENT MARGIN				86,540	42,840	14,000	29,700
Less: Common Fixed cost				74,240
Net Operating Income				12,300
Req 1:
CM ratio: Total contribution/ Total sales *100 = $281,300 /848800*100= 33.14%
Total fixed cost:		269000
Break even sales in $: Total fixed cost /CM ratio = $269000 /33.14% = $811708
Req 2a:
					VELCRO	METAL	NYLON
	Selling price per unit				1.3	1.9	1.2
	Variable cocst perunit				0.7	1.2	0.9
	Contribution margin per unit				0.6	0.7	0.3
	Traceable fixed cost				14160	119700	60900
	Break even units				23600	171000	203000
	(Traceable fixed cost / CM per unit)
Req 2b:
On selling the above break even units of each product, the ccompany will be able to recover only traceable fixed cost as contribution.
Common Fixed cost of $ 74,240 will not be recovered.
Hence, net operating loss will be $ 74,240