Question

Case 5-32 Break-Even Analysis for Individual Products in a Multiproduct Company (LO 5-5, LO 5-9] 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 $2.30 $1.00 Metal 197,000 $1.70 $1.10 Nylon 310,000 $0.70 $0.50 Total fixed expenses are $262,000 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 $262.000, $36,400 could be avoided if the Velcro product is dropped, $97,800 if the Metal product is dropped, and $37,400 if the Nylon product is dropped. The remaining fixed expenses of $90,400 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? Complete this question by entering your answers in the tabs below.

Answer 1

1	Computaion of Break even point of the company
		Velcro	Metal	Nylon	Total
	Sales(Unit selling price*Annual sale volume)	$2,66,800	$3,34,900	$2,17,000	$8,18,700
Less:	Variable cost per unit(Variable cost per unit*Annual sale volume)	$1,16,000	$2,16,700	$1,55,000	$4,87,700
	Contribution margin	$1,50,800	$1,18,200	$62,000	$3,31,000
	Contribution margin ratio =Contribution margin / Sales
	Contribution margin ratio =$331,000 / $818,700 =0.4043
	Break even point(in $) =Fixed expenses / Contribution margin ratio
	Break even point(in $) =$262,000 / 0.4043 =$648,034
		Velcro	Metal	Nylon
2	Selling price per unit	$2.30	$1.70	$0.70
	Variable cost per unit	$1.00	$1.10	$0.50
	Contribution margin per unit	$1.30	$0.60	$0.20
	Product Fixed cost (avoidable fixed cost)	$36,400	$97,800	$37,400
a	Break even point (in units)	28,000	1,63,000	1,87,000
	(Fixed cost / Contribution margin per unit)
		Velcro	Metal	Nylon	Total
b	Unit Sales	28,000	1,63,000	1,87,000	3,78,000
	Sales	$64,400	$2,77,100	$1,30,900	$4,72,400
	Less:Variable cost	$28,000	$1,79,300	$93,500	$3,00,800
	Contribution margin per unit	$36,400	$97,800	$37,400	$1,71,600
	Less:Fixed cost				$2,62,000
	Net Operating loss				-$90,400