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	101,000		206,000		318,000
Unit selling price	$	1.50	$	1.70	$	0.90
Variable expense per unit	$	0.80	$	1.10	$	0.50

Total fixed expenses are $257,000 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 $257,000, $16,940 could be avoided if the Velcro product is dropped, $97,200 if the Metal product is dropped, and $81,200 if the Nylon product is dropped. The remaining fixed expenses of $61,660 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? (number of units needed for each product to cover its own fixed cost and common fixed cost).

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:

Computation of Overall breakeven in Sales Dollar
Particulars	Velcro	Metal	Nylon	Total
Sales Volume	101000	206000	318000
Unit Selling Price	$1.50	$1.70	$0.90
Variable expenses per unit	$0.80	$1.10	$0.50
Sales	$151,500.00	$350,200.00	$286,200.00	$787,900.00
Variable Expenses	$80,800.00	$226,600.00	$159,000.00	$466,400.00
Contribution	$70,700.00	$123,600.00	$127,200.00	$321,500.00
Contribution margin (Contribution / Sales)	46.67%	35.29%	44.44%	40.80%
Fixed Expenses				$257,000.00
Breakeven Point (Fixed Expense / Contributon Margin)				$629,829.86

Solution 2:

It is assumed that common fixed expenses is to be allocated to respective product in the proportion of contribution.

Computation of Product wise breakeven Point in Sales Unit
Particulars	Velcro	Metal	Nylon
Sales Volume	101000	206000	318000
Unit Selling Price	$1.50	$1.70	$0.90
Variable expenses per unit	$0.80	$1.10	$0.50
Sales	$151,500.00	$350,200.00	$286,200.00
Variable Expenses	$80,800.00	$226,600.00	$159,000.00
Contribution	$70,700.00	$123,600.00	$127,200.00
Contribution per unit	$0.70	$0.60	$0.40
Own Fixed Cost	16940	97200	81200
Common Fixed Cost (Allocated in the proportion of dollar contribution)	$13,559.45	$23,705.06	$24,395.50
Total fixed expense	$30,499.45	$120,905.06	$105,595.50
Breakeven Point (Fixed Expense / Contributon per unit)	43571	201508	263989

b. If company sells exactly the break even quantity of each product then overall profit of the company will be zero.