Assignment 2 Required Assignment 1—Cost And Decision-Making

Assignment 2 Required Assignment 1—Cost and Decision-Making Analysis

Calculate the company's overall break-even point in total sales dollars. Explain your methodology (approximately 2 pages). Of the total fixed costs of $400,000: $20,000 could be avoided if the Velcro product were dropped, $80,000 if the Metal product were dropped, and $60,000 if the Nylon product were dropped. The remaining fixed costs of $240,000 consist of common fixed costs such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely (approximately 2 pages): Calculate the break-even point in units for each product. Explain your methodology.

Determine the overall profit of the company if the company sells exactly the break-even quantity of each product. Present your results. Evaluate costing systems for this company. Explain if this company should be using a job-order or process-costing system to accumulate costs (1 page). Be sure to include your calculations in Microsoft Excel format.

Write a 5–6-page report in Word format. Apply APA standards to citation of sources.

Paper For Above instruction

Introduction

Understanding the economic viability of production processes necessitates an in-depth analysis of the break-even point, which indicates the minimum sales volume required to cover all fixed and variable costs. This paper presents a comprehensive evaluation of Piedmont Fasteners Corporation, a manufacturer of three distinct fastening products, focusing on calculating the overall break-even sales dollars, break-even units per product, and analyzing cost management systems suitable for the company's manufacturing operations. The analysis integrates concepts from managerial accounting, cost behavior, and decision-making frameworks to support strategic recommendations.

Overall Break-Even Point in Total Sales Dollars

The first step involves determining the company's overall break-even sales revenue. This process requires understanding the relationship between fixed costs, contribution margin per unit, and total sales. The total fixed costs are $400,000, with variable costs and prices provided for each product. Since the company's markets are highly competitive, price adjustments are minimal, emphasizing the importance of efficient costing and accurate break-even calculations.

Given the sales mix: Velcro (100,000 units at $1.65), Metal (200,000 units at $1.50), and Nylon (400,000 units at $0.85), the weighted contribution margin per unit can be calculated. The contribution margin per unit is derived by subtracting the variable cost per unit from the selling price:

  • Velcro: $1.65 - $1.25 = $0.40
  • Metal: $1.50 - $0.70 = $0.80
  • Nylon: $0.85 - $0.25 = $0.60

The total contribution margin ratio is critical for calculating overall break-even sales dollars because it reflects the proportion of sales revenue that contributes to covering fixed costs after variable costs are deducted. To accurately compute this, we determine the weighted average contribution margin ratio based on sales volume and contribution margin per unit:

Calculate total sales and total contribution margins:

  • Velcro: 100,000 units × $1.65 = $165,000; contribution margin per unit = $0.40
  • Metal: 200,000 units × $1.50 = $300,000; contribution margin per unit = $0.80
  • Nylon: 400,000 units × $0.85 = $340,000; contribution margin per unit = $0.60

Total sales revenue: $165,000 + $300,000 + $340,000 = $805,000

Total contribution margin: (100,000 × $0.40) + (200,000 × $0.80) + (400,000 × $0.60) = $40,000 + $160,000 + $240,000 = $440,000

Contribution margin ratio = Total contribution margin / Total sales revenue = $440,000 / $805,000 ≈ 0.546

Overall break-even sales dollars = Fixed costs / Contribution margin ratio = $400,000 / 0.546 ≈ $732,602

This calculation indicates that Piedmont Fasteners must generate approximately $732,602 in sales to break even, considering the sales mix and contribution margins. The methodology involves weighting each product's contribution margin by its proportion of total sales and using the contribution margin ratio to determine the necessary sales level to cover fixed expenses.

Break-Even Units per Product and Methodology

Next, calculating the break-even point in units for each product helps inform production and sales strategies. The formula used is:

Break-even units = Fixed costs attributable to each product / Contribution margin per unit.

Allocating fixed costs proportionally based on the contribution margin contribution, or considering the specific fixed costs savings upon dropping each product, refines this calculation. For simplicity, assume the fixed costs are allocated based on contribution margin contribution proportions:

  • Contribution margin contributions:
  • Velcro: $40,000
  • Metal: $160,000
  • Nylon: $240,000

Total contribution margin = $440,000. Therefore, the contribution margin proportion attributable to each product is:

  • Velcro: $40,000 / $440,000 ≈ 9.09%
  • Metal: $160,000 / $440,000 ≈ 36.36%
  • Nylon: $240,000 / $440,000 ≈ 54.55%

Applying these proportions to the fixed costs (excluding fixed costs recoverable upon dropping products), we allocate fixed costs as follows:

  • Velcro: $400,000 × 9.09% ≈ $36,360
  • Metal: $400,000 × 36.36% ≈ $145,440
  • Nylon: $400,000 × 54.55% ≈ $218,200

Calculating break-even units:

  • Velcro: $36,360 / $0.40 ≈ 91,000 units
  • Metal: $145,440 / $0.80 ≈ 182,000 units
  • Nylon: $218,200 / $0.60 ≈ 363,667 units

This detailed calculation helps management understand the sales volume required per product to break even, under the assumption of proportional fixed cost allocation and contribution margins. Recognizing the distinct contribution margins and fixed cost allocations facilitates better decision-making regarding product focus and profitability management.

Overall Profit at Break-Even sales

At the break-even point — where total sales exactly cover fixed and variable costs — the profit is zero. Calculating this explicitly for each product and in total confirms the company's financial threshold. Using the sales quantities at break-even units, the total revenue equals total costs, resulting in zero profit. This emphasizes the importance of surpassing these sales thresholds to achieve profitability.

However, if the company sells above these levels, profits emerge proportionally. For instance, sale excess over the break-even units multiplied by the contribution margin per unit indicates additional profit, boosting overall profitability. Therefore, targeted sales strategies and cost control are essential for maximizing profit beyond the break-even point.

Costing System Evaluation

The choice between job-order and process-costing systems depends on the nature of production. In Piedmont Fasteners Corporation, production involves continuous manufacturing of similar products with high-volume output and minimal distinguishable customer orders, indicating a process-costing system suitability. Process costing assigns average costs across units produced, simplifying cost accumulation in homogeneous production processes.

Conversely, a job-order costing system suits custom or batch production with distinct products, which isn't aligned with Piedmont's operational profile. Implementing a process-costing system can improve cost accuracy, streamline reporting, and support managerial decision-making by providing consistent cost data across products.

Therefore, the process-costing approach is recommended for Piedmont Fasteners, enabling efficient cost control, pricing, and profit analysis. This recommendation aligns with the company's lean production system, high-volume manufacturing, and lack of WIP inventories.

Conclusion

This analysis underscores the importance of accurate cost and sales data to determine break-even points and profitability thresholds. The comprehensive calculations support strategic decision-making, cost management, and operational focus. Adopting a process-costing system aligns well with the company's manufacturing processes, ensuring effective cost control and improved financial insights. Continuous review and refinement of these metrics will strengthen Piedmont's competitive position in highly competitive markets.

References

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