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       102,000   192,000   295,000
Unit selling price $1.70      $1.80      $1.10
Variable expense per unit    $ 0.80    $ 1.10        $ 0.90

Total fixed expenses are $255,000 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.

2. Of the total fixed expenses of $255,000, $19,620 could be avoided if the Velcro product is dropped, $119,700 if the Metal product is dropped, and $39,000 if the Nylon product is dropped. The remaining fixed expenses of $76,680 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

Solution :- a. Calculation of break even point in unit sales for each product :-

Particulars	Velcro	Metal	Nylon
Selling Price per unit	$ 1.70	$ 1.80	$ 1.10
Less : Variable expense per unit	$ 0.80	$ 1.10	$ 0.90
Contribution per unit	$ 0.90	$ 0.70	$ 0.20

Fixed Expenses allocated to Velcro product = $ 19620

Fixed Expenses allocated to Metal product = $ 119700

Fixed Expenses allocated to Nylon product = $ 39000

Break even point (in unit sales) = Fixed expenses / Contribution per unit

Particulars	Velcro	Metal	Nylon
Fixed expenses [A]	$ 19620	$ 119700	$ 39000
Contribution per unit [B]	$ 0.90	$ 0.70	$ 0.20
Break even point (in unit sales) [A/B]	21800 Units	171000 Units	195000 Units

b. Calculation of overall profit of the company If the company sells exactly the break-even quantity of each product :-

Particulars	Velcro	Metal	Nylon
Contribution per unit [A]	$ 0.90	$ 0.70	$ 0.20
No. of units [B]	21800 Units	171000 Units	195000 Units
Total Contribution [A*B]	$ 19620	$ 119700	$ 39000

Total Contribution (All products) = $ 178320

Less : Total fixed expenses = $ 255000

Overall Profit = ($ 76680)

At break even point , total contribution = total fixed expenses ,therefore overall profit (loss) is equal to remaining fixed expenses ($ 76680) .Therefore , Overall loss for the company = $ 76680.