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 116,000 $1.70 $1.10 Metal 201,000 $1.30 $0.60 Nylon 319,000 $0.90 $0.70 Total fixed expenses are $274,000 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.

Answer 1

Solution 1:

Computation of Product wise and overall contribution margin ratio - Piedmont Fasteners Corporation
Particulars	Velcro	Metal	Nylon	Total
Sales units	116000	201000	319000
Selling price per unit	$1.70	$1.30	$0.90
Variable cost per unit	$1.10	$0.60	$0.70
Sales Revenue	$197,200.00	$261,300.00	$287,100.00	$745,600.00
Variable cost	$127,600.00	$120,600.00	$223,300.00	$471,500.00
Contribution	$69,600.00	$140,700.00	$63,800.00	$274,100.00
Contribution Margin Ratio	35.2941%	53.8462%	22.2222%	36.7623%

Overall break even point in dollar sales = Fixed expenses / Overall CM ratio = $274,000 / 36.7623% = $745,329

Solution 2a:

Computation of Breakeven point of each product
Particulars	Velcro	Metal	Nylon
Selling price per unit	$1.70	$1.30	$0.90
Variable cost per unit	$1.10	$0.60	$0.70
Contribution per unit	$0.60	$0.70	$0.20
Fixed expenses related to each product	$12,480.00	$111,300.00	$38,800.00
Breakeven point (Sales Units) (Fixed Expenses / Contribution per unit)	20800	159000	194000

Solution 2b:

If company sell exact break even quantity of each product, then it will not be able to recover fixed costs not identified to individual product and same will be the loss to the company.

Overall profit (Loss) = ($12,480 + $111,300 + $38,800) - $274,000 = (111,420) - Loss