Cheryl Montoya picked up the phone and called her boss, Wes Chan, the vice presi

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:

Total fixed expenses are $266,000 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 $266,000, $13,320 could be avoided if the Velcro product is dropped, $100,200 if the Metal product is dropped, and $99,000 if the Nylon product is dropped. The remaining fixed expenses of $53,480 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?

Velcro Metal Nylon Annual sales volume 113,000 185,000 308,000 Unit selling price $ 1.70 $ 1.50 $ 1.70 Variable expense per unit $ 1.10 $ 0.90 $ 1.20

Explanation / Answer

SOLUTION

1.

* Sales-

(113,000 * $1.70 = $192,100) , (185,000 * $1.50 = $277,500), (308,000 * $1.70 = $523,600)

**Variable Expense-

(113,000 * $1.10 = $124,300) , (185,000 * $0.90 = $166,500), (308,000 * $1.20 = $369,600)

Contribution margin ratio = Contribution margin / Sales

= 332,800 / 993,200 = 33.50%

Dollar sales to breakeven = Fixed Expenses / CM ratio

= $226,000 / 33.50%

= $674,627

2. A.

B.

* Sales-

(22,200 * $1.70 = $37,740) , (167,000 * $1.50 = $250,500), (198,000 * $1.70 = $336,600)

**Variable Expense-

(22,200 * $1.10 = $24,420) , (167,000 * $0.90 = $150,300), (198,000 * $1.20 = $237,600)

Velcro ($) Metal ($) Nylon ($) Total ($) Sales * 192,100 277,500 523,600 993,200 Variable Expense** 124,300 166,500 369,600 660,400 Contribution Margin 67,800 111,000 154,000 332,800 Fixed Expenses 266,000 Net Opearting Income 66,800

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