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The Fashion Shoe Company operates a chain of women’s shoe shops that carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a sales commission on each pair of shoes sold plus a small base salary.
The following data pertains to Shop 48 and is typical of the company’s many outlets:
| Per Pair of Shoes |
||||||
| Selling price | $ | 40.00 | ||||
| Variable expenses: | ||||||
| Invoice cost | $ | 16.00 | ||||
| Sales commission | 4.00 | |||||
| Total variable expenses | $ | 20.00 | ||||
| Annual | ||||||
| Fixed expenses: | ||||||
| Advertising | $ | 45,000 | ||||
| Rent | 31,000 | |||||
| Salaries | 155,000 | |||||
| Total fixed expenses | $ | 231,000 | ||||
6. Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $35,400 annually. If this change is made, what will be Shop 48's new break-even point in unit sales and dollar sales? (Do not round intermediate calculations.)
Step two of question one:
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 | 110,000 | 204,000 | 292,000 | |||
| Unit selling price | $ | 1.60 | $ | 1.70 | $ | 1.00 |
| Variable expense per unit | $ | 0.90 | $ | 1.00 | $ | 0.60 |
Total fixed expenses are $269,000 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.
The company has an extremely effective lean production system, so there are no beginning or ending work in process or finished goods inventories.
Required:
1. What is the company’s over-all break-even point in dollar sales?
2. Of the total fixed expenses of $269,000, $14,630 could be avoided if the Velcro product is dropped, $110,600 if the Metal product is dropped, and $77,600 if the Nylon product is dropped. The remaining fixed expenses of $66,170 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 of the company?
1.
New fixed expenses:
| Advertising | $45,000 |
| Rent | 31,000 |
| Salaries | 190,400 |
| Total | $266,400 |
New contribution margin per unit = $40 - $16 = $24 per unit
New breakeven point in unit sales = New fixed expenses / New contribution margin per unit
New breakeven point in unit sales = $266,400 / $24 = 11,100 units
New breakeven point in dollar sales = New breakeven point in unit sales * Selling price per unit
New breakeven point in dollar sales = 11,100 * $40 = $444,000
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