Calculate the break-even point

Assignment Help Financial Accounting

Reference no: EM132213646 , Length: 6 pages

Financial Accounting 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 $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.

1. Calculate what the company's over-all break-even point in total sales dollars. Explain your methodology (approximately 2 pages). 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 (approximately 2 pages):

2a. Calculate the break-even point in units for each product. Explain your methodology.

b. Explain if the company sells exactly the break-even quantity of each product, what will be the overall profit of the company and show your results.

3. Compare and explain if this company should be using a job order or process-costing system to accumulate costs (one page).

Formula: Sales = units sold * selling price per unit Velcro - 100,000 * $1.65 = $165,000 Metal - 200,000 * $1.50 = $ 300,000 Nylon - 400,000 * $0.85 = $ 340,000 Total Sales $ 805,000 Formula: Variable Cost per unit * unit sold Velcro -$1.25 * 100,000 = $ 125,000 Metal - $0.70 * 200,000 = $ 140,000 Nylon - $0.25 * 400,000 = $ 100,000 Total Variable $ 365,000 Formula: Sales- Variable = Contribution Margin $805,000 - $365,000 = $440,000 Piedmont Fasteners Corp. Projected Annual Net Income Sales $ 805,000 Variable Expenses - 365,000 Contribution Margin 440,000 Fixed Expenses - 400,000 Net Income $ 40,000 Formula: CM ratio = CM= $ 440,000 = 0.54658 = 54.6% Sales $ 850,000 Break Even Point in total sales dollars = FC/CMR = $400,000/ 54.6% = $732,600.73 1785_Calculate the break-even point1.png 864_Calculate the break-even point2.png Velcro Sales (50,000units @ $1.65) $82,500 Variable (50,000 units @ $1.25) - 62,500 Contribution Margin 20,000 Less: Fixed Cost for Velcro - 20,000 Profit 0 Metal Sales (100,000units @ $1.50) $150,000 Variable (100,000units @ $0.70) - 70,000 Contribution Margin 80,000 Less: Fixed Cost for Metal - 80,000 Profit 0 Nylon Sales (100,000units @ $0.85) $85,000 Variable (100,000units @ $0.25) - 25,000 Contribution Margin 60,000 Less: Fixed Cost for Velcro - 60,000 Profit 0 Piedmont Fasteners Corp. Overall Net Income Sales (250,000 @ $4.00) $1,000,000 Variable (250,000 @ $2.20) - 550,000 Contribution Margin 450,000 Less: Fixed Cost - 400,000 Profit $ 50,000

There are three reasons Piedmont Fasteners should use job-order to accumulate cost. First, job-order costing should be use because the units of product are not identical.

There are different products and the amounts are different(Garrison, Noreen, & Brewer, 2010). Second, costs are not accumulated by a department; it is accumulated by individual products(Garrison, Noreen, & Brewer, 2010).

Lastly, unit costs are not computed by department they are computed by job on the job cost sheet(Garrison, Noreen, & Brewer, 2010).

Reference no: EM132213646

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