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: Annual sales volume Unit selling price Variable expense per unit Velcro 119,000 $1.80 $1.00 Metal 210,000 $2.00 $1.30 Nylon 316,000 $1.40 $1.00 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, $24,000 could be avoided if the Velcro product is dropped, $116,200 if the Metal product is dropped, and $81,200 if the Nylon product is dropped. The remaining fixed expenses of $35,600 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 :-1. Calculation of Company's overall Break even point in dollar sales :-

First of all , we will calculate overall Contribution margin ratio on the basis of Weighted average of Annual Sales Volume.

	Velcro	Metal	Nylon
Selling Price Per Unit	$ 1.80	$ 2.00	$ 1.40
Less : Variable Cost per Unit	($ 1.00)	($ 1.30)	($ 1.00)
Contribution Margin per Unit	$ 0.80	$ 0.70	$ 0.40

	Velcro	Metal	Nylon
Contribution Margin Ratio = Contribution Margin Per Unit / Selling price per unit * 100	0.80 /1.80*100 = 44.44%	0.70/ 2.00*100=35%	0.40/1.40*100= 28.57%
Sales Volume	119000	210000	316000
Weight = Product Units /Total Units	119000/645000 = 0.1845	210000 / 645000=0.32.56	316000 / 645000 = 0.4899

Weighted Average Contribution Margin Ratio = 44.44% * 0.1845 + 35% * 0.3256 + 28.57% * 0.4899

= 8.20 % + 11.40 % + 14.00 % = 33.60 %

Company's Overall Breakeven point in sales dollars = Total Fixed Expenses / Weighted Average Contribution Margin ratio

= $ 257000 / 33.60% = $ 764880.95

2 a ) . Calculation of Break Even Point in Unit Sales for each product :-

It is Given that $ 24000 could be avoided if Velcro product is dropped , therefore These fixed expenses are specifically related to Velcro Product and also $ 116200 are for metal product & $ 81200 are for Nylon Product.

	Velcro	Metal	Nylon
Selling Price Per Unit	$ 1.80	$ 2.00	$ 1.40
Less : Variable Cost per Unit	($ 1.00)	($ 1.30)	($ 1.00)
Contribution Margin per Unit	$ 0.80	$ 0.70	$ 0.40
Allocated Fixed Expenses	$ 24000	$ 116200	$ 81200
Break even Point = Fixed Expenses / Contribution per Unit	$ 24000/ $ 0.80 = 30000 Units	$ 116200 / $ 0.70 = 166000 Units	$ 81200 / $ 0.40 = 203000 Units

b. If the Company sells exactly the breakeven quantity of each product , then at Breakeven point ,the profit for these Products is Zero. Only Remaining Fixed Expenses of $ 35600 are to be Deducted.

Profits from all these products at brekeven point	$ 0
Less : Remaining Fixed Expenses	( $ 35600)
Overall Loss to the Company	($ 35600)