Cheryl Montoya picked up the phone and called her boss, Wes Chan, the vice presi
ID: 340864 • Letter: C
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 $269,000 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 $269,000, $14,160 could be avoided if the Velcro product is dropped, $119,700 if the Metal product is dropped, and $60,900 if the Nylon product is dropped. The remaining fixed expenses of $74,240 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 95,000 191,000 302,000 Unit selling price $ 1.30 $ 1.90 $ 1.20 Variable expense per unit $ 0.70 $ 1.20 $ 0.90Explanation / Answer
SEGMENT-WISE INCOME STATEMENT TOTAL VELCRO METAL NYLON AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 848,800 123,500 362,900 362,400 Less: Variable cost 567,500 66,500 229,200 271,800 Contribution margin 281,300 57,000 133,700 90,600 Less: Traceable fixed cost 194,760 14,160 119,700 60,900 SEGMENT MARGIN 86,540 42,840 14,000 29,700 Less: Common Fixed cost 74,240 Net Operating Income 12,300 Req 1: CM ratio: Total contribution/ Total sales *100 = $281,300 /848800*100= 33.14% Total fixed cost: 269000 Break even sales in $: Total fixed cost /CM ratio = $269000 /33.14% = $811708 Req 2a: VELCRO METAL NYLON Selling price per unit 1.3 1.9 1.2 Variable cocst perunit 0.7 1.2 0.9 Contribution margin per unit 0.6 0.7 0.3 Traceable fixed cost 14160 119700 60900 Break even units 23600 171000 203000 (Traceable fixed cost / CM per unit) Req 2b: On selling the above break even units of each product, the ccompany will be able to recover only traceable fixed cost as contribution. Common Fixed cost of $ 74,240 will not be recovered. Hence, net operating loss will be $ 74,240
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