Calculating the Company’s Overall Break-Even Point in Total Sales Dollars
Break-even analysis is one of the most popular tools used to evaluate economic feasibility of both products and enterprises. The point at which the firm realizes revenue over the costs incurred in the entire operations is crucial in determining its continued sustainability In business and many financial analysts have called such a point the point of breaking even for the firm. The point can be expressed in terms of the money that the firm requires to realize in order to sustain its business in the industry.
Methodology
Costs that are variable and those that are fixed form the two most important elements necessary for the establishment of a break-even point of an organization at any given period in its operation. Costs that do not vary with the given output levels of a firm form the fixed costs meaning that at whatever level of a company’s produce, the same amount of this type of costs is sustained. On the other hand, variable costs change as the out level increases or decreases. The present problem involves three multiple products. In order to establish the break even of an organization, the accounting officer of the organization should compute the figure sin dollars through the use of a contribution margin. The contribution margin is simply the dollar amounts contributed by each product sold toward meeting fixed cost expenses. Piedmont Fasteners Corporation makes three different clothing fasteners and as a result sells three different products. The breakeven calculation is therefore different from a company selling a single product. Each of the three products each has a different selling price, a different variable cost, and consequently different contribution margins (Garrison, Noreen & Brewer, 2012).
. The breakeven point will as a result depend on selling mix for the three different clothing fasteners.
The contribution margin ratio (54.66% is very important) as it indicates how the companys contribution margin will be affected if total sales change. The 54.66% implies that if the companys sales increases by a dollar, the total contribution margin increases by 54 cents; that is $1 multiplied by the contribution margin of 54.66%. The companys net income will equally increase by 54 cents as long as the fixed costs remain unchanged at $400,000. The breakeven point can be then be computed as follows:
Fixed Expenses / Total Contribution Margin =$400,000/ 0.5466 =$ 731,796.6
Piedmont Fasteners Corporation must make sales worth $ 731,796.6 from the three products for it to meet its operating expenses.
Calculate the Break-Even Point in Units for Each Product
The Equation Methodology
In calculating the Break-Even Point in Units for Each Product, use is made of the equation method. The format of the income statement can b captured by the following equation: Profit= [Sales-Variable costs] – Fixed Costs. This equation can be rearranged to yield the cost-volume profit analysis equation as follows: Sales= Variable Costs+ Fixed Costs+ Profit (Garrison, Noreen & Brewer 2012).
Drawing from the definition of breakeven analysis point-the volume of sales at which the company makes zero profits- breakeven point can be calculated by determining that point at which sales equals to total variable costs plus fixed costs and zero profits.
Velcro Breakeven Point Calculation
Sales= Variable Costs+ Fixed Costs +Profit
Breakeven point is calculated by finding that point at which the company makes zero profits.
$1.65Q=$1.25Q+$20,000+0Q
$20,000 = $1.65Q-$1.25Q
$20,000/$0.4=0.4Q/0.4
Q=50,000 Units, where Q represents the number of units sold.
Metal Breakeven Point Calculation
Sales= Variable Costs+ Fixed Costs +Profit
$1.50Q=$0.70Y+$80,000+ 0Q
$1.50Q-$0.70Y+ 0Q=$80,000
$0.8Q=$80,000
Q= [80,000/0.8] = 100,000 Units, where Q represents Quantity
Nylon Breakeven Point Calculation
Sales= Variable Costs+ Fixed Costs +Profit
$0.85Q= $0.25Q+$60,000+ 0Q
$0.85Q-$0.25Q =$60,000
0.6Q=60,000
Q=60,000/0.6
Q=100,000 Units.
Overall Profit of the Company if the Company Sells Exactly the Break-Even Quantity of Each Product
Profit = total sales revenue- total variable costs
Total sales = (50,000*$1.65+100,000*$1.5+ 100,000*$0.85) = $317,500.00
Total variable costs= (50,000*$1.25 +100,000*$0.70+100,000*$0.25) = $157,500.00
Overall profit for the company= $317,500.00-$157,500.00 = $160,000.00
Evaluation of Costing Systems for this Company and Recommendation on the Best System
Costing is very important in every business as it helps the business to reduce it cots and maximize it profitability. A Costing system can be defined as a systematic as a systematic assignment of costs to various products. Costing can equally help a company to plan, control its operations, and make major decisions (Garrison, Noreen & Brewer, 2012).
In the job order costing system, a cost sheet is made for each production order that is to be worked on in the factory. Inputs used on the job are reflected on the cost sheet through job tickets. When a task is completed, factory costs are reflected in the cost sheet through rates. The total expenses associated with a job are computed by summing the costs of materials, factory expense and labor. Average cost is determined by dividing the total cost by the level of output.
On the other hand, in the process system, an account is opened for each individual operation that a product passes through. Labor costs and any other expense incurred in the process are transferred to the relevant process account during the costing period daily, weekly or monthly. At the end of the costing period, unit conversion cost is computed for each process by dividing the sum of labor and expense for the particular product by the total output produced. Product costs are computed by summing the average costs of materials per unit of the product and the relevant unit conversion expenses; this yields average costs per unit of a given products in a particular costing period (Garrison, Noreen & Brewer, 2012).
Recommendation
The process system of costing is the best for Piedmont Fasteners Corporation given that they produce three products that are identical (all are clothing fasteners). Through this system, they company will have adequate control because it will be possible to assign costs to each of the three products (Velcro, metal and nylon). The process costing system further suits the company because its production process is continuous and as a result fits in the mass production procedure of cost accounting. Through this system the company will gain a number of benefits that include: it will be in a position to use a report to gather, analyze and compute its total and average costs, each department Velcro, metal and nylon will accumulate and report its own production, all costs from each department will be reflected in their respective work in process accounts. Furthermore, it will be easier for management to know which products are costlier yet deliver less to the companys bottom line. In addition, factory, material and labor costs will be known for each department, easier determination of per unit cost for every department, and costs can be transferred from department to another. Drawing from the definition of breakeven analysis point-the volume of sales at which the company makes zero profits- breakeven point can be calculated by determining that point at which sales equals to total variable costs plus fixed costs and zero profits.
Costing is very important in every business as it helps the business to reduce it cots and maximize it profitability. A Costing system can be defined as a systematic as a systematic assignment of costs to various products. Costing can equally help a company to plan, control its operations, and make major decisions. Costs that do not vary with the given output levels of a firm form the fixed costs meaning that at whatever level of a company’s produce, the same amount of this type of costs is sustained. On the other hand, variable costs change as the out level increases or decreases. The present problem involves three multiple products. Costs that are variable and those that are fixed form the two most important elements necessary for the establishment of a break-even point of an organization at any given period in its operation. The contribution margin is simply the dollar amounts contributed by each product sold toward meeting fixed cost expenses. Piedmont Fasteners Corporation makes three different clothing fasteners and as a result sells three different products.
Reference
Garrison, R. H., Noreen, E. W. & Brewer, P. C. (2012). Managerial accounting.14 ed. New York, NY: McGraw Hill/Irwin.