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.

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 8:00am sharp in time for the follow-up meeting at 9:00am.

            Piedmont Fasteners Corporation makes three different clothing fasteners in its manufacturing facility in North Carolina.  Data concerning these products appear below:

	Velcro	Metal	Nylon
Normal annual sales volume	100,000	200,000	400,000
Unit selling price	$1.65	$1.50	$0.85
Variable expense per unit	$1.25	$0.70	$0.25

 

Total fixed expenses are $400,000 per year.

All three products are sold in highly competitive markets, so the company is unable to raise its prices without losing 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?

	VELCRO	METAL	NYLON
Selling Price per Unit	$1.65	$1.50	$0.85
Variable Cost per Unit	$1.25	$0.70	$0.25
Contribution Margin Ratio	$0.40	$0.80	$0.60
Sales Mix %	14.29%	28.57%	57.14%
Contribution Margin per Unit	$0.06	$0.23	$0.34
Weighted - Average Contribution Margin Ratio	$0.63

Sales Mix BEP in Units			=		Total Fixed Cost / Weighted Ave CM Ratio
			=		$ 400,000 / $0.63
BEP in Units			=		634, 920.63
				VELCRO		METAL	NYLON
	Sales Mix %			14.29%		28.57%	57.14%
	BEP in Units			634, 920.63		634, 920.63	634, 920.63
	Product units @ BEP			90, 730.16		181, 396.82	362, 793.65
	Selling Price per Unit			$1.65		$1.50	$0.85
	BEP in Dollars			$ 149, 704.76		$272, 095.23	$308, 374.60
	Total Sales Mix BEP in dollars			$ 730, 174.59

*Company’s over-all break-even point in dollar sales is $ 730, 174.59

2.     Of the total fixed expenses of $400,000, $20,000 could be avoided if the Velcro product is dropped, $80,000 if the Metal product is dropped, and $60,000 if the Nylon product is dropped.  The remaining fixed expenses of $240,000 consists 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?

VELCRO BEP			=	TFC / (P-VC)
			=	$ 260, 000 / $0.40
			=	650, 000
METAL BEP			=	TFC / (P-VC)
			=	$ 320, 000 / $ 0.80
			=	400, 000
NYLON BEP			=	TFC / (P-VC)
			=	$ 300, 000 / $ 0.60
			=	500, 000

*Breakeven point in unit for Velcro is 650,000

*Breakeven point in unit for Metal is 400,000

*Breakeven point in unit for Nylon is 500,000

b.     If the company sells exactly the break-even quantity of each product, what would be the overall profit of the company?  Explain the result.

(Formula):

= (BEP of Velcro * Price per Unit) + (BEP of Metal * Price per Unit) + (BEP of Nylon *    Price per Unit)

= (650,000*1.65) + (400,000*1.50) + (500,000*0.85)

            = $ 1,072, 500 + $ 600,000 + $ 425,000

            = $ 2, 097, 5000

*The overall profit of the company at breakeven point of each product is $ 2, 097, 500. The computation for it is stated above.