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	114,000		206,000		299,000
Unit selling price	$	2.20	$	1.60	$	1.40
Variable expense per unit	$	1.10	$	1.00	$	0.90

Total fixed expenses are $259,000 per year.

All three products are sold in highly competitive markets, so the company is unable to raise prices without losing an unacceptable number 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?

2. Of the total fixed expenses of $259,000, $24,420 could be avoided if the Velcro product is dropped, $98,400 if the Metal product is dropped, and $101,500 if the Nylon product is dropped. The remaining fixed expenses of $34,680 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

1	Computaion of Break even point of the company
		Velcro	Metal	Nylon	Total
	Sales(Unit selling price*Annual sale volume)	$250,800	$329,600	$418,600	$999,000
Less:	Variable cost per unit(Variable cost per unit*Annual sale volume)	$125,400	$206,000	$269,100	$600,500
	Contribution margin	$125,400	$123,600	$149,500	$398,500
	Contribution margin ratio =Contribution margin / Sales
	Contribution margin ratio =$398,500 / $999,000 =0.39889889889
	Break even point(in $) =Fixed expenses / Contribution margin ratio
	Break even point(in $) =$259,000 / 0.39889889889 =$649,287
		Velcro	Metal	Nylon
2	Selling price per unit	$2.20	$1.60	$1.40
	Variable cost per unit	$1.10	$1.00	$0.90
	Contribution margin per unit	$1.10	$0.60	$0.50
	Product Fixed cost (avoidable fixed cost)	$24,420	$98,400	$101,500
a	Break even point (in units)	22,200	164,000	203,000
	(Fixed cost / Contribution margin per unit)
		Velcro	Metal	Nylon	Total
b	Unit Sales	22,200	164,000	203,000	389,200
	Sales	$48,840	$262,400	$284,200	$595,440
	Less:Variable cost	$24,420	$164,000	$182,700	$371,120
	Contribution margin	$24,420	$98,400	$101,500	$224,320
	Less:Fixed cost				$259,000
	Net Operating loss				-$34,680