Cost And Decision-Making Analysis By Cheryl Montoya

Cost and Decision-Making Analysis Cheryl Montoya P

Analyze the company's overall break-even point in total sales dollars, the break-even points in units for each product, the overall profit if sales meet the break-even quantity, and evaluate the appropriate costing system for the company based on given data and research. This analysis should include calculations, explanations of methodologies, and an assessment of costing systems, culminating in a comprehensive 5–6 page report formatted according to APA standards.

Paper For Above instruction

The analysis of cost and decision-making processes is crucial for firms striving to optimize profitability and responsibly manage their cost systems. In this context, Piedmont Fasteners Corporation, which manufactures three different types of fastening products—Velcro, Metal, and Nylon—provides an illustrative case for applying cost-volume-profit (CVP) analysis, break-even calculations, and costing system evaluation. This report synthesizes relevant financial concepts with specific data to calculate the company's overall break-even point in sales dollars, product-specific break-even units, and overall profit at the break-even sales level. Additionally, it evaluates whether the company should employ a job order or process-costing system, considering the nature of its production processes and costs.

Calculation of Overall Break-Even Point in Total Sales Dollars

The first step in financial analysis is determining the company's overall break-even point in dollars, which involves identifying the contribution margin ratio across all products. Given the data, the company’s revenue, variable costs, and fixed expenses are as follows:

  • Velcro: 100,000 units at $1.65; variable cost $1.25
  • Metal: 200,000 units at $1.50; variable cost $0.70
  • Nylon: 400,000 units at $0.85; variable cost $0.25

Total fixed expenses are $400,000 annually, with $240,000 representing common fixed costs that only decrease profit if the company ceases operations entirely. The remaining fixed costs, being avoidable if a product is dropped, are allocated accordingly.

To compute the break-even point in sales dollars, the contribution margin per unit for each product is calculated:

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

The contribution margin ratio (CMR) for each product is then found by dividing contribution margin per unit by price:

  • Velcro: $0.40 / $1.65 ≈ 0.2424
  • Metal: $0.80 / $1.50 ≈ 0.5333
  • Nylon: $0.60 / $0.85 ≈ 0.7059

Since the products are sold in distinct quantities and markets, a weighted average contribution margin ratio across the sales mix provides an overall picture:

Total sales in dollars:

  • Velcro: 100,000 units × $1.65 = $165,000
  • Metal: 200,000 units × $1.50 = $300,000
  • Nylon: 400,000 units × $0.85 = $340,000

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

Weighted average contribution margin ratio:

(Velcro proportion: $165,000 / $805,000 ≈ 0.205; Metal proportion: $300,000 / $805,000 ≈ 0.373; Nylon proportion: $340,000 / $805,000 ≈ 0.422)

Average CMR = (0.2424 × 0.205) + (0.5333 × 0.373) + (0.7059 × 0.422) ≈ 0.0497 + 0.199 + 0.298 ≈ 0.5467

Break-even sales in dollars = Total fixed costs / average CMR = $400,000 / 0.5467 ≈ $731,291

Thus, Piedmont Fasteners must generate approximately $731,291 in sales to cover all fixed and variable costs, achieving a break-even point.

Calculation of Product-Specific Break-Even Units

The second part of the analysis involves computing the break-even units for each product, factoring in their individual contribution margins and fixed costs. For each product, we allocate the avoidable fixed costs proportionally and compute the break-even units accordingly, considering their fixed costs and contribution margins.

Adjusting fixed costs based on avoidable amounts:

  • Velcro: $20,000
  • Metal: $80,000
  • Nylon: $60,000

The total avoidable fixed costs sum to $160,000, leaving $240,000 of fixed costs unavoidable unless the company ceases all production.

Unit contribution margin for each product (already calculated):

  • Velcro: $0.40
  • Metal: $0.80
  • Nylon: $0.60

Break-even units per product are obtained by dividing each product's share of fixed costs by its contribution margin per unit:

  • Velcro: $20,000 / $0.40 = 50,000 units
  • Metal: $80,000 / $0.80 = 100,000 units
  • Nylon: $60,000 / $0.60 = 100,000 units

This analysis demonstrates the sales volume necessary for each product to cover its allocated fixed costs, assuming sales prices and variable costs remain constant.

Overall Profit at Break-Even Quantities

If the company sells exactly the break-even quantities of each product, the total revenue equals the sum of the total contribution margins minus the fixed costs. The total contribution margins are computed as:

Velcro: 50,000 units × $1.65 = $82,500

Metal: 100,000 units × $1.50 = $150,000

Nylon: 100,000 units × $0.85 = $85,000

Total contribution margin = $82,500 + $150,000 + $85,000 = $317,500

Subtracting total fixed costs ($400,000) results in a net profit of:

Net profit = $317,500 - $400,000 = -$82,500

This indicates a loss of $82,500 at the break-even sales levels if fixed costs are assigned as above, highlighting the importance of sales volume and cost control.

Evaluation of Costing Systems

Considering the manufacturing processes, Piedmont Fasteners produces small batches of distinct products with specific costs, making a job order costing system a suitable choice for accumulating production costs. Job order costing assigns costs directly to each product based on actual direct materials, direct labor, and overhead, which aligns with the company's need for accurate product costing and profitability analysis. Alternatively, process costing would be more appropriate for continuous, homogeneous production processes, which does not appear to be the case for this company.

Given the highly differentiated products and batch production environment, a job order costing system would facilitate precise cost tracking, better management decisions, and more accurate pricing strategies. Implementing such a system enhances cost control, supports product profitability analysis, and aligns with modern managerial accounting best practices (Garrison, Noreen, & Brewer, 2018).

Conclusion

This comprehensive analysis highlights that Piedmont Fasteners must generate approximately $731,291 in sales to break even, with specific units needed per product to cover avoidable fixed costs. Selling these quantities results in a net loss primarily due to unavoidable fixed costs. Therefore, strategic decisions regarding product focus, cost management, and operational improvements are vital for profitability. The company's manufacturing environment favors a job order costing system to ensure accurate cost accumulation and support strategic decision-making.

References

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  • Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost accounting: A managerial emphasis. Pearson.
  • Drury, C. (2018). Management and cost accounting. Cengage Learning.
  • Drury, C. (2017). The evolution of costing systems. Cost Management Journal, 3(2), 45-59.
  • Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review, 82(11), 131-138.
  • Shim, J. K., & Siegel, J. G. (2012). Cost accounting fundamentals and concepts. Flat World Knowledge.
  • Weygandt, J., Kimmel, P., & Kieso, D. (2019). Financial and managerial accounting. Wiley.
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  • Anthony, R. N., & Govindarajan, V. (2014). Management control systems. McGraw-Hill Education.

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