Piedmont Fasteners Corporation Break even analysis

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 Piedmont Fasteners Corporation Break even analysis

The calculation of the breakeven point for the sales volumes is very important for the firm. This

is because it will assist the firm determine the number of sales volumes that it must, make in

order to remain afloat and also determine the cost that the firm will need to use in order to make

this production a reality. It also assist the firm be able to anticipate the materials required as well

assist in the determination of whether it is sustainable and convenient to continue producing

some products or not. It will also be very useful in assisting the firm calculate the break even

amounts in the dollar amounts (Beri, 2010). The formula used to calculate the breakeven is

Break-even point = Fixed expenses/Contribution margin ratio

In this formula, the fixed costs of the firm are first identified and then the contribution margin

calculated. Usually the contribution margin is calculated as the difference between the price of

the product and the variable cost for each unit.

The case of Piedmont Fasteners Corporation, the breakeven point will be calculated using the

following important step. We first calculate the sales amounts expected by multiplying the sales

units by the price of the three different products. The variable expenses have been arrived at by

multiplying the unit variable contribution to the total amount of volumes being sold.

The contribution margin is calculated by subtracting the variable component of each unit from

the price of the unit. This is important as it helps in calculation of the margins that the unit sales

are contributing to the firm.

 Velcro Metal Nylon Total
Sales $165,000 $300,000 $340,000 $805,000
Variable expenses 125,000 140,000 100,000 365,000
Contribution margin $ 40,000 $160,000 $240,000 440,000
Fixed expenses 400,000
Net operating income $ 40,000

It is also important to calculate the contribution margin of each unit. This is the amount that the

unit is saving for the firm which is in excess of the sales. The ratio is important as it shows how

the unit dales compare to the income margins (Levine & Boldrin, 2007). To gain an in depth

understanding of the entire contribution margin and the actual sales units that the firm requires to

make is calculated as follows

Velcro Metal Nylon

Unit selling price ...........................................................................................
$1.65 $1.50 $0.85
Variable cost per unit ....................................................................................
1.25 0.70 0.25
Unit contribution margin (a) .........................................................................
$0.40 $0.80 $0.60

The three products contribute a different margin to the overall incomes. The Velcro

contributes a 40% income from its sales while the metal products earn the firm a huge margin

of 80 percent and nylon products have a margin contribution of 60 percent. This means that

each product is able to meet its fixed cost at a different rate from the others.

Contribution margin ratio = Contribution margin/Sales

= $440,000/$805,000
 = 0.5466

Break-even point in dollars = Fixed expenses/Contribution margin ratio

= $400,000/0.5466

= $731,796.6

This means that the firm requires $732,000 in sales revenues in dollars to break even. Any figure

below this will mean that the firm is unable to meet its costs and therefore may closedown

operations. A figure above this will name that the firm is able to turn more gross incomes

(Albrecht, Stice, Stice, & Swain, 2007)

2) In most cases, the managers usually assign a fixed amount to help ascertain the actual

profitability of each singular item. This is because the firm can be able to avoid some of the

fixed costs associated with some of the products. However, there must be fixed cost

components under which the firm cannot be able to do without. These include some items

such as the administrative finances of the firm.

a. The break even points for each of the product would be calculated as follows.

Velcro metal nylon sum

Fixed cost 20,000 80,000 60,000 160000
price 1.65 1.5 0.85 4
variable cost 1.25 0.7 0.25 2.2
BEP 11111.11 100000 100000

This is when taking into account the specific portion of the fixed costs that are associated with

each product. With this rate, the Velcro would require 11, 111 units to cover the fixed costs,

metal will require 100,000 unit s and the nylon will also take 100,000 units.
For the firm to be able to cover up the fixed cost of 240, 0000 that is unchangeable and must be

always meet if the business is in operations, the allocation of these costs will be assigned as

follows

Velcro Metal Nylon Total

Unit sales 50,000 100,000 100,000
Sales $82,500 $150,000 $85,000 $ 317,500
Variable expenses 62,500 70,000 25,000 157,500
Contribution margin $20,000 $ 80,000 $60,000 160,000
Fixed expenses 400,000
Net operating income $(240,000)

These unchangeable fixed costs in the firm will be assigned as follows

Velcro Metal Nylon Total

Sales $165,000 $300,000 $340,000 $805,000
Percentage of total sales 20.497% 37.267% 42.236% 100.0%
Allocated common fixed expense* $49,193 $ 89,441 $101,366 $240,000
Product fixed expenses 20,000 80,000 60,000 160,000
Allocated common and product fixed

expenses (a) $69,193 $169,441 $161,366 $400,000

Unit contribution margin (b) $0.40 $0.80 $0.60
Break-even point in units sold (a) 172,983 211,801 268,943
 (b)

*Total common fixed expense percentage of total sales

This implies that the firm will require to sell 172,983 units of Velcro, 211,801 units of metal and

268,943 units of nylon products in order to break even. To estimate the products that may be

dropped we have to compare the sales and the break even points. If the products have, a higher

breakeven point than the breakeven point such products need be drooped since they are

unsustainable as will make the firm only make loses

Velcro Metal Nylon

Normal annual sales volumes 100,000 200,000 400,000
Break-even annual sales 172,983 211,801 268,943
Strategic decision drop drop retain

In most cases, the managers would consider the breakeven point to be lower than the sales

volumes required (Kinney & Raiborn, 2012). In this case, the firm is free to drop both the Velcro

and metal product since they are of a high break even points than what the firm can be able to

afford. The remaining nylon products are strategically able to meet the firms capacity since they

require a lower breakeven point of 268,000 compare to the sales volumes of 400,000

Dropping of Velcro products will mean that the firm makes a loss of 60,000. This is calculated as

below
 Velcro Metal Nylon Total
Sales dropped dropped $340,000 $340,000
Variable expenses 100,000 100,000
Contribution margin $240,000 240,000
Fixed expenses* 300,000
Net operating income $(60,000)

The action to drop the two products has the effect of making the fixed expenses of the firm to

decrease by 100,000 (20,000+80,000). This will bring the total fixed expenses to 300,000

A profit of 40,000 will be realized as a result of dropping the two products and suffer a loss of

60, 0000 because these two product were contributing a combination of 100,000 in the coverage

of the common fixed costs. This is as follows

Velcro Metal Nylon Total

Sales $165,000 $300,000 $340,000 $805,000
Variable expenses 125,000 140,000 100,000 365,000
Contribution margin 40,000 160,000 240,000 440,000
Product fixed expenses 20,000 80,000 60,000 160,000
Product segment margin $ 20,000 $ 80,000 $180,000 280,000
Common fixed expenses 240,000
Net operating income $ 40,000
$100,000

Various firms use different costing techniques to apportion the cost elements in their production

process. The e approach to use depends with the type of production, the scale, and the nature of

the products. Job costing is a unique way of costing where the firm takes in account the

accumulated costs that go into production process as assigned to the specific units that require

these costs (Kinney & Raiborn, 2012). The firm takes into account all the costs that are included
in making the production process achievable and then summing up all these costs together to

come up with the final costs that the unit has used. The items considered in this costing include

the material used, the labor that has gone into the process, even to the storage charges the firm

has incurred. The job costing is essential as it assist the firm be able to track the extent to which

its profits from a given job that goes into the production of given items.

The process costing on the other hand is majorly used for products that may not be distinguished

from each other. It involves the accumulation of costs for the process that are lengthy and the

production process cannot be broken into smaller process. The costs are accumulated and then

divided by the number of units produced (Mitra, 2009)

Given the major differences and the nature of the products that the firm is producing, I would

prefer process costing for the firm. This is majorly due to the uniqueness of the product that the

firm is producing. Most of the items the firm is producing are standard in nature and therefore

cannot be accounted as a single item. The firm is also not be able to have the staffs that are

required to constantly keep records for the job costing approach since the scale of the production

process is very large.

References

Albrecht, W., Stice, J., Stice, E., & Swain, M. (2007). Accounting: Concepts and Applications.

Mason: Cengage Learning.

Beri. (2010). Business Statistics 3E. Tata McGraw-Hill Education.

Kinney, M., & Raiborn, C. (2012). Cost Accounting: Foundations and Evolutions. Cengage

Learning.

Levine, D., & Boldrin, M. (2007). Against Intellectual Monopoly. Cambridge : Cambridge

University Press.

Mitra, J. K. (2009). Advanced Cost Accounting. New Age International.