Accounting

There are 3 questions attached with the correct answer. Use each question and write Case Study as if you were a consultant hired by the company and are presenting to the president.

For each question and answer explain the terminology and concepts used. For example, in #1 rather than just give the breakeven for each scenario, explain the change in the volume of sales, explain the calculation – this is a professional report from a consultant to an executive committee.

Use one outside source per question outside sources when necessary.

When giving a recommendation, back it up with numbers.

ANSWER

Accounting Case Study

1. What is the company’s overall break-even point in dollar sales?

Piedmont Fasteners Corporation presents a multi-product situation. In this case, the cost-volume-profit is determined using dollar sales. The break-even dollar sales represent the revenue required to cover the company’s operational costs. First, the sales units were multiplied by the cost per unit of each product to obtain the sales revenue. The contribution margin is obtained by subtracting the variable costs from the sales revenues. In this case, the variable costs are expenses that change based on the volume of products.

The break-even point is calculated by dividing fixed expenses with the contribution margin ratio. A contribution margin ratio is acquired by expressing the contribution margin as a percentage (Gallo, 2017). The ratio provides an insight into the available funds to cover fixed costs. As shown in the calculations, the break-even sales were calculated after compiling the contribution margins of the Velcro, Metal, and Nylon. However, the fixed costs are shared among the three products. The break-even sales were estimated at $669,942. Notably, the company’s overall total revenue is $770,800 indicating a surplus after covering all costs. The table shows Velcro as having the least contribution of $64,800, while Metal has the largest contribution. A contribution margin ratio for each product can be used to decide whether to drop or keep a product.

2 a. What is the break-even point in unit sales for each product?

The table highlights the particulars used to determine the break-even point in unit sales for the three products. Contrary to break-even dollar sales, the sales unit break even point is estimated using the contribution per unit. However, the contribution ratio for each product is essential in assessing each product’s capability to cover its associated costs (Estevez, 2020). In this sense, the product with a higher ratio provides more money to cover overhead expenses. Velcro, Metal, and Nylon have a contribution margin ratio of 42.8571%, 41.1765%, and 40.0000% respectively.

An important aspect, in this case, is that the contribution ratio in unit form differs from that of the total sales, as some products recorded more sales than others. Thus, while a product can have a higher contribution margin per unit, the number of sales are important factors to consider. The break-even units are obtained by dividing fixed expenses with the contribution margin for each product’s unit. From the results presented in the table, it is evident that Velcro requires  29,000 units to cover its fixed expenses, which are lower compared to Metal’s 158,000 and Nylon’s 198,000 units. Besides, at the break-even point, each product is expected to cover the fixed costs linked to its production.

1. If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company?

The procedure for accessing the overall profit at break-even quantity entails determining the total sales, variable costs, and contribution margins of each product. The 29,900 break-even units obtained in the previous question are multiplied with the sales price of $1.40 per unit to determine the sales revenue (ACCA, 2021). The total variable costs for the three products are then subtracted from the total sales revenue. In this case, the idea is to determine the overall contribution of the combined products. By selling at break-even units, the company generates an overall contribution margin of $207,740, causing a deficit of about $67,260. Given the fixed costs of $275,000, selling the break-even quantity would record losses over the period.

Fundamentally, the fixed expenses of each product are equal to its contribution. While the break-even quantity is expected to cover the fixed expenses, common expenses including rent and administrative salaries led to a negative value in the profits. In this case, selling at break-even units would neglect the unavoidable costs associated with common expenses.

References

ACCA, (2021). Cost-Volume-Profit Analysis. https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/CVP-analysis.html

Estevez, E. (2020). Contribution Margin Definition. Investopedia. https://www.investopedia.com/terms/c/contributionmargin.asp

Gallo, A. (2017). Contribution Margin: What It Is, How to Calculate It, and Why You Need It. Harvard Business Review. https://hbr.org/2017/10/contribution-margin-what-it-is-how-to-calculate-it-and-why-you-need-it