Piedmont Fasteners Corporation makes three different clothingfasteners in its manufacturing facility in North Carolina. Allthree products are sold in highly competitive markets, so thecompany is unable to raise prices without losing an unacceptablenumber of customers. Data from the most recent period concerningthese products appear below:
| Velcro | Metal | Nylon |
| Annual sales volume | | 103,800 | | | 207,600 | | | 415,200 | |
| Unit selling price | $ | 1.65 | | $ | 1.50 | | $ | 0.85 | |
| Variable expense per unit | $ | 1.25 | | $ | 0.70 | | $ | 0.25 | |
| Contribution margin per unit | $ | 0.40 | | $ | 0.80 | | $ | 0.60 | |
|
Total fixed expenses are $412,000 per period. Of the total fixedexpenses, $20,000 could be avoided if the Velcro product isdropped, $80,000 if the Metal product is dropped, and $60,000 ifthe Nylon product is dropped. The remaining fixed expenses of$252,000 consist of common fixed expenses such as administrativesalaries and rent on the factory building that could be avoidedonly by going out of business entirely.
The company's managers would like to compute the break-evenpoint in dollar sales for the company as a whole, and thebreak-even point in unit sales for each product. They areconsidering two methods for computing each product's break-evenpoint unit sales:
Method #1: Include each product's traceable fixed costsand an allocated share of the common fixed costs in the numeratorof each break-even calculation. The common fixed costs would beallocated to the three products using sales dollars as theallocation base.
Method #2: Only include each product's traceable fixedcosts in the numerator of each break-even calculation.
Required:
1. Using data from the most recent period, prepare acontribution format segmented income statement.
2. What is the company’s over-all break-even point in dollarsales?
3a. Calculate the break-even point in unit sales for eachproduct using method 1.
3b. If the company sells exactly the break-even quantity of eachproduct, what will be the overall profit for the company usingmethod 1?
4a. Calculate the break-even point in unit sales for eachproduct using method 2.
4b. If the company sells exactly the break-even quantity of eachproduct, what will be the overall profit for the company usingmethod 2?
5. Which method should the company use to calculate eachproduct's break-even point in unit sales?
