Piedmont Fasteners Corporation makes three different clothing fasteners in its

Piedmont fasteners corporation makes three different

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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 is 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 $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 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? Explanation: 1. The overall break-even sales can be determined using the CM ratio. Velcro Metal Nylon Total Sales $ 165,000 $ 300,000 $ 340,000 $ 805,000 Variable expenses 125,000 140,000 100,000 365,000 Contribution margin $ 40,000 $ 160,000 $ 240,000 440,000 Fixed expenses 400,000 Net operating income $ 40,000 CM ratio = Contribution margin = $440,000 = 0.5466 Sales $805,000 Dollar sales to break even = Fixed expenses = $400,000 = $732,000 (rounded) CM ratio 0.5466 2. The issue is what to do with the common fixed cost when computing the break-evens for the individual products. The correct approach is to ignore the common fixed costs. If the common fixed costs are included in the computations, the break-even points will be overstated for individual products and
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managers may drop products that in fact are profitable. a. The break-even points for each product can be computed using the contribution margin approach as follows: Velcro Metal Nylon Unit selling price $ 1.65 $ 1.50 $ 0.85 Variable cost per unit 1.25 0.70 0.25 Unit contribution margin (a) $ 0.40 $ 0.80 $ 0.60 Product fixed expenses (b) $ 20,000 $ 80,000 $ 60,000 Unit sales to break even (b) ÷ (a) 50,000 100,000 100,000 b. If the company were to sell exactly the break-even quantities computed above, the company would lose $240,000—the amount of the common fixed cost. This can be verified as follows: Velcro Metal Nylon Total Unit sales 50,000 100,000 100,000 Sales $ 82,500 $150,000 $ 85,000 $ 317,500 Variable expenses 62,500 70,000 25,000 157,500 Contribution margin $ 20,000 $ 80,000 $ 60,000 160,000 Fixed expenses 400,000 Net operating loss $ (240,000)
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Question 3 Pittman Company is a small but growing manufacturer of telecommunications equipment. The
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