Q9: (15 Marks) A call center in Asian country used by U.S. and U.K. credit card

Question

Q9: (15 Marks) A call center in Asian country used by U.S. and U.K. credit card holders has a capacity of 1,400,000 calls annually The fixed cost of the center is $775,000 with an average variable cost of $1 and revenue of $2.50 per call. (a) Find the percentage of the call capacity that must be placed each year to break even. (b) The center manager expects to dedicate the equivalent of 500,000 of the 1,400,000 capacity to a new product line. This is expected to increase the center's fixed cost to $900,000 of which 50% will be allocated to the new product line. Determine the average revenue per call necessary to make 500,000 calls the breakeven point for only the new product. How does this required revenue compare with the current center revenue of $2.50 per call?

Explanation / Answer

9.

A.

Breakeven point = Fixed cost/(revenue per call – variable cost per call)

Breakeven point = 775000/(2.5-1) = 516666.7 or 516667 calls

total number of calls per year = 1400000

% of calls required for the breakeven = 516667/1400000

% of calls required for the breakeven = 36.9%

B.

Fixed cost for the new product line = $450000

variable cost = $1 per call

Let revenue per call = X

breakeven point = 500000 calls

Breakeven point = Fixed cost/(revenue per call – variable cost per call)

500000 = 450000/(X-1)

X = (450000/500000) + 1

X = $1.9

Since the fixed cost has comedown, then it requires average revenue per call to be only $1.9 that is less than the revenue per call, a center is earning at present and it is $2.5 per call. Further, the breakeven point has also come down due to the lowering of the fixed cost. It is the reason that the center can achieve the breakeven at the 500000 units even if the revenue is $1.9 per call of the new product line.

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