Henry Nnorom

OBJECTIVE: To find the break even point across the products.

Terminology used:
1. Break-even point: In accounting, the breakeven point is calculated by dividing
the fixed costs of production by the price per unit minus the variable costs of
production. The breakeven point is the level of production at which the costs
of production equal the revenues for a product.
2. Variable cost: A variable cost is a corporate expense that changes in
proportion to production output. Variable costs increase or decrease
depending on a company's production volume; they rise as production
increases and fall as production decreases. Examples of variable costs
include the costs of raw materials and packaging. A variable cost can be
contrasted with a fixed cost.
3. Contribution margin: The contribution margin is computed as the selling price
per unit, minus the variable cost per unit. Also known as dollar contribution
per unit, the measure indicates how a product contributes to the overall profit
of the company. It provides one way to show the profit potential of a particular
product offered by a company and shows the portion of sales that helps to
cover the company's fixed costs. Any remaining revenue left after covering
fixed costs is the profit generated

SOURCE: Staff, I. (2020, July 08). Understanding Contribution Margins. Retrieved

September 15, 2020, from
https://www.investopedia.com/terms/c/contributionmargin.asp

Background
Piedmont Fasteners Corporation makes three different clothing fasteners at its
manufacturing facility in North Carolina. Data concerning these products appear
below:
Velcro Metal Nylon
Normal annual sales volume 111000 units 190000 units 309000 units
Unit selling price $ 1.80 $ 1.60 $ 1.50
Variable cost per unit $ 0.90 $ 0.90 $ 1.10
Analysis
First of all, let we present the overall break-even point
PRODUCT
  VELCRO METAL NYLON TOTAL
ANNUAL SALES 111000 190000 units 309000 units  
VOLUME units
UNIT SELLING PRICE $ $ 1.60 $  
1.80 1.50
SALES (PRICE* $ $ 3,04,000.00 $ $
VOLUME) 1,99,800.00 4,63,500.00 9,67,300.0
0
VARIABLE EXPENSE $ $ 0.90 $  
PER UNIT 0.90 1.10
VARIABLE COST $ $ 1,71,000.00 $ $
(VARIABLE 99,900.00 3,39,900.00 6,10,800.0
EXPENSE*VOLUME) 0
CONTRIBUTION $ $ 1,33,000.00 $ $
MARGIN (SALES- 99,900.00 1,23,600.00 3,56,500.0
VARIABLE COST) 0
LESS FIXED COST $
2,64,000.0
0
NET PROFIT $
(CONSTRIBUTION 92,500.00
MARGIN – FIXED
COST)

FORMULA
CONTRIBUTION 0.36855163 TOTAL
MARGIN RATIO 9 CONTRIBUTIO
N MARGIN/
SALES
 BREAK EVEN POINT 716317.531 NET PROFIT/
6 CONTRIBUTIO
N MARGIN
RATIO

So overall break-even point should be 716318 units.

For if we categorize this based on products and using similar mechanics, we will get
the following break-even points
PRODUCT
  VELCRO METAL NYLON
UNIT SELLING PRICE 1.8 1.6 1.5
VARIABLE EXPENSE 0.9 0.9 1.1
PER UNIT
CONTRIBUTION 0.9 0.7 0.4
MARGIN (UNIT
SALES PRICE-
VARIABLE EXPENSE)
LESS FIXED COST 22860 118300 79200
UNIT SALES BREAK 25400 169000 198000
EVEN (FIXED COST/
CONTRIBUTION
MARGIN)

The net profit at producing these breakeven quantities, we will get

PRODUCT
  VELCRO METAL NYLON TOTAL
ANNUAL SALES 25400 169000 198000  
VOLUME
UNIT SELLING PRICE 1.8 1.6 1.5  
 SALES (PRICE* 45720 270400 297000 613120
VOLUME)
VARIABLE EXPENSE 0.9 0.9 1.1  
PER UNIT
VARIABLE COST 22860 152100 217800 392760
(VARIABLE
EXPENSE*VOLUME)
CONTRIBUTION 22860 118300 79200 220360
MARGIN (SALES-
VARIABLE COST)
LESS FIXED COST 264000
NET PROFIT -$43,640
(CONSTRIBUTION
MARGIN – FIXED
COST)

We are getting the negative profit as it is the common fixed cost so we should deal
with that as well because without that it seems incomplete analysis.

So, let us distribute the common fixed cost based on the sales revenue.
  VELCRO METAL NYLON
SALES VOLUME 111000 190000 309000
 PRESENTLY
UNIT SELLING PRICE $ 1.80 $ 1.60 $ 1.50  
SALES (VOLUME*PRICE) $ 1,99,800.00 $ 3,04,000.00 $ 4,63,500.00 $ 9,67,300.00
TOTAL SALES
REVENUE
CONTRIBUTION TO SALES 21% 31% 48%
(SALES REVENUE/TOTAL
SALES REVENUE) *100
VARIABLE EXPENSE PER $ 0.90 $ 0.90 $ 1.10
UNIT
CONTRIBUTION MARGIN $ 0.90 $ 0.70 $ 0.40
(SALES- VARIABLE COST)
COMMON FIXED COST 9014.030807 13715.04187 20910.92732
CONTRIBUTION
(CONTRIBUTION TO
SALES* 43640(COMMON
FIXED COST))
PRODUCT FIXED COST 22860 118330 79200
TOTAL FIXED COST 31874.03081 132045.0419 100110.9273
(COMMON FIXED COST +
PRODCUT FIXED COST)
UNIT SALES BREAK EVEN 35416 188636 250277
(FIXED COST/
CONTRIBUTION MARGIN)

So, the above quantities show effectively the break-even of different products more accurately. Firm
has a higher contribution margin in Velcro so they should produce more of that rather than the other
products.