In: Accounting
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 | |
Normal annual sales volume | 118,000 | 219,000 | 418,000 |
Unit selling price | $2.70 | $2.90 | $1.75 |
Variable expense per unit | $1.89 | $1.16 | $0.70 |
Total fixed expenses are $840,000 per year. |
All three products are sold in highly competitive markets, so the company is unable to raise its prices without losing 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? (Round CM ratio to 4 decimal places and final answer to the nearest thousand dollars.) |
2. |
Of the total fixed expenses of $840,000, $55,080 could be avoided if the Velcro product is dropped, $205,320 if the Metal product is dropped, and $123,900 if the Nylon product is dropped. The remaining fixed expenses of $455,700 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? (Do not round intermediate calculations.) |
b. |
If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company? (Do not round intermediate calculations.) |
Solution 1:
Computation of Product wise and overall contribution margin ratio - Piedmont Fasteners Corporation | ||||
Particulars | Velcro | Metal | Nylon | Total |
Sales units | 118000 | 219000 | 418000 | |
Selling price per unit | $2.70 | $2.90 | $1.75 | |
Variable cost per unit | $1.89 | $1.16 | $0.70 | |
Sales Revenue | $318,600.00 | $635,100.00 | $731,500.00 | $1,685,200.00 |
Variable cost | $223,020.00 | $254,040.00 | $292,600.00 | $769,660.00 |
Contribution | $95,580.00 | $381,060.00 | $438,900.00 | $915,540.00 |
Contribution Margin Ratio | 30.0000% | 60.0000% | 60.0000% | 54.3283% |
Fixed Expenses = $840,000
Breakeven sales (In dollars) = Fixed expenses / Overall contribution margin ratio = $840,000 / 54.3283% = $1,546,156
Solution 2a:
Computation of Breakeven point of each product | |||
Particulars | Velcro | Metal | Nylon |
Selling price per unit | $2.70 | $2.90 | $1.75 |
Variable cost per unit | $1.89 | $1.16 | $0.70 |
Contribution per unit | $0.81 | $1.74 | $1.05 |
Fixed expenses related to each product | $55,080.00 | $205,320.00 | $123,900.00 |
Breakeven point (Sales
Units) (Fixed Expenses / Contribution per unit) |
68000 | 118000 | 118000 |
Solution 2b:
If company sells exactly the breakeven quantity of each product the company will not be able to recover its common fixed cost. Therefore overall Profit (Loss) to the company = ($455,700)