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. What is the break-even point in unit sales for each product? If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company? Explain this result.
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. What is the break-even point in unit sales for each product? If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company? Explain this result.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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5-32 #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.
- What is the break-even point in unit sales for each product?
- If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company? Explain this result.
Transcribed Image Text:**Chapter 5: Cost-Volume-Profit Relationships**
**Case 5-32: Break-Even Analysis for Individual Products in a Multiproduct Company (Learning Objectives 5-5, 5-9)**
Cheryl Montoya picked up the phone and called her boss, Wes Chan, the vice president of marketing at Piedmont Fasteners Corporation.
**Conversation:**
- **Cheryl:** Wes, I'm not sure how to go about answering the questions that came up at the meeting with the president yesterday.
- **Wes:** What's the problem?
- **Cheryl:** The president wanted to know the break-even point for each of the company’s products, but I am having trouble figuring them out.
- **Wes:** 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.
**Company Context:**
Piedmont Fasteners Corporation manufactures three different types of clothing fasteners at its facility in North Carolina. The data for these products are:
| | Velcro | Metal | Nylon |
|---------------------|---------|---------|--------|
| **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 cannot increase prices without losing significant numbers of customers.
- The company's very lean production system means no beginning or ending work in progress or inventories.
**Required Analysis:**
1. Determine the company's overall break-even point in dollar sales.
2. Of the total fixed expenses of $400,000:
- $20,000 could be saved if the Velcro product were dropped.
- $80,000 could be saved if the Metal product were dropped.
- $60,000 could be saved if the Nylon product were dropped.
- The remaining $240,000 of fixed expenses are common and could only be eliminated if the company closed entirely.
- Calculate:
- a. The break-even point in unit sales
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