Question

Case Study

• PF Corporation makes three different clothing fasteners in its manufacturing facility in North Carolina. Data concerning these products appear below:

Product	V	M	N
Normal Annual Sales Volume	100,000	200,000	400,000
Unit Selling Price	$ 1.65	$ 1.50	$ 0.85
Variable Expenses per unit	$ 1.25	$ 0.70	$ 0.25
Total Fixed Expenses are $400,000 per year.

• All the three products are sold in highly competitive markets, so the company is unable to raise its prices without losing unacceptable numbers of customers. Fixed Expenses for V, M and N are $20,000, $80,000 and $60,000 respectively.
• The company has an extremely effective lean production system, so there are no beginning or ending work in process or finished goods inventories. Make necessary assumptions, wherever necessary.

Required:

1. What is the company’s break-even point in dollar sales?
2. Compute the break-even point for each product using contribution margin approach.
3. Critically analyze all the three products and suggest which product should be removed from the market with valid justifications.
4. Discuss the usefulness of Break-Even Analysis to various stakeholders such as customers, marketing departments and finance department of an organization.
5. Critically evaluate the limitations of Break-Even Analysis

Answer 1

Working Note as follows:

Product	V	M	N	Total
Sales (Units) (A)	100,000	200,000	400,000
Unit selling price (B)	$1.65	$1.50	$0.85
Total Sales [C = A×B]	$165,000.00	$300,000.00	$340,000.00	$805,000.00
Variable expense per unit (D)	$1.25	$0.70	$0.25
Total Variable cost [E = A × D]	$125,000.00	$140,000.00	$100,000.00	$365,000.00
Contribution margin per unit (B - D)	$0.40	$0.80	$0.60
Total Contrbution margin [C - E]	$40,000.00	$160,000.00	$240,000.00	$440,000.00

____________________________________________________________________

Compute Company's Breakeven point in dollars sales:

	V	M	N
Fixed Cost	$20,000	$80,000	$60,000
	÷	÷	÷
Contribution margin per unit	$0.40	$0.80	$0.25
Breakeven point in units	50000	100000	240000