Multiple-Level Break-Even Analysis Nielsen Associates provides marketing service

Question

Multiple-Level Break-Even Analysis Nielsen Associates provides marketing services for a number of small manufacturing firms. Nielsen receives a commission of 10 percent of sales. Operating costs are as follows: Unit-level costs $0.02 per sales dollar Sales-level costs $100 per sales order Customer-level costs $800 per customer per year Facility-level costs $60,000 per year

(a) Determine the minimum order size in sales dollars for Nielsen to break even on an order

(b) b) Assuming an average customer places four orders per year, determine the minimum annual sales required to break even on a customer.

(c) c) What is the average order size in (b)?

(d) (d) Assuming Nielsen currently serves 100 customers, with each placing an average of four orders per year, determine the minimum annual sales required to break even

(e) (e) What is the average order size in (d)?

Explanation / Answer

a. Calculation of minimum order size in sales dollars for Nielsen to break even on an order: Sales-level costs per Sales order $100 Commission as % of sales 10% Minimum order size in sales dollars for Nielsen to break even on an order = 100 / 10% = $        1,000 Unit-level costs per sales dollar $          0.02 Sales-level costs per Sales order $100 Customer-level costs per customer per year 800 Facility-level costs per year 60000 b. Calculattion of minimum annual sales required to break even on a customer: Customer-level costs per customer per year 800 Commission as % of sales 10% Minimum annual sales required to break even on a customer = 800/ 10% = $        8,000 c. Calculation of average order size: Minimum annual sales required to break even on a customer $        8,000 Orders Per year 4 Average order size = 8000/4 = $        2,000 d. Calculation of minimum annual sales required to break even: Customer-level costs per customer per year $           800 Number of customers per year 100 Total Cost per year = 100*800 = $      80,000 Commission as % of sales 10% minimum annual sales required to break even = 80000/10% = $     800,000 e. Calculation of average order size: Minimum annual sales required to break even on a customer $     800,000 Orders Per year = 100*4 = 400 Average order size = 800000/400 = $        2,000

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