Question

KM Case Study #1 [LO 6-5, LO 6-9] Susan Lo picked up the phone and called her boss, Phil Takata, the vice president of marketing at Jewel Clasps Corporation: “Phil, 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, Susan. 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.” Jewel Clasps Corporation makes three different types of jewelry clasps in its manufacturing facility in North Carolina. Data concerning these products appear below: Gold Silver Copper Annual sales volume 114,000 199,000 286,000 Unit selling price $ 1.80 $ 1.30 $ 1.30 Variable expense per unit $ 1.00 $ 0.70 $ 1.10 Total fixed expenses are $274,000 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. **TIP: To answer the questions below, it will be most helpful if you prepare segmented income statements as illustrated in your textbook Required: 1. What is the company’s over-all break-even point in dollar sales? 2. Of the total fixed expenses of $274,000, $22,320 could be avoided if the Gold product is dropped, $94,200 if the Silver product is dropped, and $37,400 if the Copper product is dropped. The remaining fixed expenses of $120,080 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.

Contribution Margin Income Statement
Particulars	Gold	Silver	Copper	Total
Annual Sales Volume	114,000	199,000	286,000
Unit Selling Price	$ 1.80	$ 1.30	$ 1.30
Sales Revenue	$ 205,200	$ 258,700	$ 371,800	$ 835,700
Variable Expenses	114,000	139,300	314,600	567,900
Contribution Margin	91,200	119,400	57,200	267,800
Fixed Expenses				274,000
Net Income / (loss)				-6,200

CM Ratio = 267,800 / 835,700 = 32.04%

Breakeven = Fixed expenses / CM Ratio = 855,048 (855,181 if rounded up CM ratio)

2.
a.

Particulars	Gold	Silver	Copper
Unit selling price	$ 1.80	$ 1.30	$ 1.30
Variable cost per unit	$ 1.00	$ 0.70	$ 1.10
Contribution Margin in units (a)(unit selling price - variable cost per unit)	$ 0.80	$ 0.60	$ 0.20
Product fixed Expenses (b)	$ 22,320	$ 94,200	$ 37,400
Break-even point in unit sales {(b) ÷ (a)}	27,900	157,000	187,000

b

Contribution Margin Income Statement
Particulars	Gold	Silver	Copper	Total
Annual Sales Volume	27,900	157,000	187,000
Unit Selling Price	$ 1.80	$ 1.30	$ 1.30
Sales Revenue	$ 50,220	$ 204,100	$ 243,100	$ 497,420
Variable Expenses	27,900	109,900	205,700	343,500
Contribution Margin	22,320	94,200	37,400	153,920
Fixed Expenses				274,000
Net Income / (loss)				-120,080