Piedmont Fasteners Corporation makes three different clothing fasteners in its m
ID: 2368639 • Letter: P
Question
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 cost 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 effective lean production system, so there are no beginning or ending work in process or finished goods inventories.
Question: Of the total fixed costs of $400,000, $20,000 could be avoided if the Velcro product were dropped, $80,000 if the Metal product were dropped, and $60,000 if the Nylon product were dropped. The remaining fixed costs of $240,000 consist of common fixed costs such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely.
What is the break-even point in units for each product and the overall profit of the company if each product is sold at the exact break-even quantity?
Explanation / Answer
Break-even sales in units: Break-even point in units can be calculated using the below formula. Break-even point = (Profit + Total fixed cost) / Contribution margin per unit Contribution margin per unit can be calculated as follows; Contribution margin per unit = Selling price - variable cost per unit Velcro product: Contribution margin per unit = 1.65 - 1.25 = 0.40 Metal product: Contribution margin per unit = 1.50 - 0.70 = 0.80 Nylon product: Contribution margin per unit = 0.85 - 0.25 = 0.60 Total fixed cost = $400,000 Profit at break-even point = 0 Now we can calculate the break-even point using the above information; Break-even point: Velcro product: Break-even point = (Profit + total fixed cost) / Contribution margin per unit = (0 + 400,000) / 0.40 = 1,000,000 units. Metal product = (0+ 400,000) / 0.80 = 500,000 units Nylon product = (0 + 400,000) / 0.60 = 666,666 units