ACCOUNTING CASE QUESTIONS

Accounting Case Questions

Accounting Case Questions

Calculate what the company's over-all break-even point in total sales dollars. Explain your methodology.

In the case of Piedmont Fasteners Corporation, we have three brands named Velcro, Metal and Nylon. The case describes a situation where a company's supply cannot be changed without affecting its customer case. In highly competitive markets, such a phenomenon is very common. Although the corporation has had a strong lean manufacturing facility, it cannot go to impact its price because of the market. However, an idea of the point where the company will be able to reap advantage of its fixed cost will help us to align our marketing and business strategies accordingly (Weetman 2002). Hence, there is a dire need to get the breakeven point, both in unit sales, and in dollar sales.

Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. The contribution margin method is actually just a short cut conversion of the equation method already described. The approach centers on the idea discussed earlier that each unit sold provides a certain amount of contribution margin that goes toward covering fixed cost. To find out how many units must be sold to break even, divide the total fixed cost by the unit contribution margin. he major benefits to use break even analysis is that it indicates the lowest amount of business activity necessary to prevent losses.

Using the excel spreadsheet; we can calculate the overall breakeven point or 'BEP'. First we put the information on the spreadsheet for each of the brands produced by the corporation. Since, each brands costs and prices are different, we have put it in different columns to arrive at totals. The Breakeven point is calculated by dividing the fixed cost of a product or project by its contribution margin (Drury, 2000). Contribution margin, in turn, is arrived at by subtracting the variable cost (per unit) from the price (per unit) of the product. Breakeven point (in units) represents the level of unit sales before a company is able to recover its fixed cost (Baker 1998).

Piedmont Fasteners Corporation

 

 

 

 

Product/Brand

Velcro

Metal

Nylon

Total

Annual Sales Volume

100000

200000

400000

700000

Variable Cost Per Unit

1.25

0.75

0.25

2.25

Price Per Unit

1.65

1.5

0.85

4

Contribution Margin (Price - Variable Cost per unit)

0.4

0.75

0.6

1.75

Product Specific Fixed Cost

20000

80000

60000

160000

Other Fixed Costs (Salaries, Rent)

34286

68571

137143

240000

Overall Fixed Cost

54286

148571

197143

400000

BEP (Units) FC/Contribution Margin

135714

198095.2

328571.4

 

Sales at BEP (price * BEP units)

223929

297142.9

279285.7

800357.1

Variable Costs (Variable Cost Per Unit * BEP units)

169643

148571.4

82142.86

 

Fixed Costs

54286

148571

197143

 

Total Costs

223929

297143

279286

 

Overall Profits

0

0

0

 

For Piedmont Fasteners Corporation, the fixed costs have two kinds. One group represents the product or brand specific fixed cost. This type of cost relates directly with the brand in case. For instance, Velcro's brand specific fixed cost of $20000 shows costs of Velcro's fixed costs alone. In other words, if the company decides to drop production of this brand altogether, it will be able to cut this amount in its total or overall fixed costs. The other type of fixed cost is the company specific fixed ...