CASE $4-35$

Break$-$Eren Lerels for Indiridual Products in a Multi$-$Product Company $[[$

Jasmine Richards met her boss. Rick McNeil, at the pop machine in the lobby. McNeil is the vice president of marketing at

Down East Lures Corporation. Richards was puzzled by some calculations she had been doing. so she initiated this conversation:

Richards: Rick. I$\text{'}$m not sure how to go about answering the questions that came up at the meeting with the president yesterday.

Mc$.$Veil: What's the problem?

Richards: The president wanted to know the break$-$even point for each of the company's products, but I$\text{'}$m having trouble flguring

them out.

Mc$.$Veil: I$\text{'}$m sure you can handie it$,$ Jasmine. And, by the way. I need your analysis on my desk tomorrow morning at $8$:$00$ A$.$M$.$

sharp so I can look at it before the follow$-$up meeting at $9$:$00.$

Down East Lures makes three flshing lures in its manufacturing facility in Prince Edward Island. Data concerning these

products appear below:

Total fixed expenses for the entire company are $$282,000$ 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 no work in

process or finished goods inventories due to an extremely effective lean manufacturing system.

Required:

What is the company's overall breakeven point in total sales dollars?

Of the total fixed costs of $$282,000,$$$18,000$ relate directly to the Frog lure product, $$96\mathrm{.}000$ relate directly to the Minnow

lure product, and $$60,000$ relate directly to the Worm lure product. The remaining fixed expenses of $$108,000$ consist of

common flxed costs such as administrative salaries, rent on the factory building. and advertising expenses for the company as

a whole. These common fixed expenses are not directly related to any particular product but must be incurred as part of

operating the business.

a$.$ What is the breakeven point in units for each product? Note: Management insists that Richards separately calculate the

break$-$even point for each product using its $CM$ per unit and only the fixed expenses that relate directly to that product.

b$.$ If the company sells exactly the break$-$even quantity of each product calculated in $($a$).$ calculate the overall profit of the

company. Explain this result to management.

c$.$ Calculate the company's overall break$-$even point in units using the weighted$-$average CM approach. How many units of each

product must be sold at the break$-$even level? Comment on any significant differences you see between these results and

those of $($a$)$ above.