CASE 5-32 Broak-Even Analysis for Individual Products In a Multiproduct Company L05-52, L05-92 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: 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 $390,000 per year. All three products are sold in highly competitive markets, so the company is unable to raise prices without losing an unacceptable numbers of customers. Page 240 The company has an extremely effective lean production system, so there are no beginning or ending work in process or finished goods inventories. 2. Of the total fixed expenses of $390,000: $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 $230,000 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 or loss of the company? Explain this result, including total sales dollars at the individual product break-evens and the total sales dollars at the company break-even. 3. Analyze (narrate with supporting data) results, including importance of understanding and properly determining variable and fixed costs, contribution margin (total and by product), and segment analysis. 4. What decision(s) may erroneously be made without accurate management reporting (e.g., making decisions using BE company vs BE product)? Can you back-up your comments with additional data analysis from the case? Be specific to this case, yet you may add general issues/concerns as well
