Multiple-Level Break-Even Analysis Nielsen Associates provides marketing service
ID: 2586925 • Letter: M
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:
(a) Determine the minimum order size in sales dollars for Nielsen to break even on an order.
$Answer
(b) Assuming an average customer places five orders per year, determine the minimum annual sales required to break even on a customer.
$Answer
(c) What is the average order size in (b)?
$Answer
(d) Assuming Nielsen currently serves 100 customers, with each placing an average of five orders per year, determine the minimum annual sales required to break even.
$Answer
(e) What is the average order size in (d)?
$Answer
(f) Explain the differences in the answers to (a), (c), and (e).
Even if individual orders have a positive contribution, some customers may be unprofitable.
In multiple customer firms the break-even point decreases as the number of customers increases.
The most important costs to cover are unit level costs.
In the long-run the most important costs are facility level costs.
Unit-level costs $0.02 per sales dollar Sales-level costs $300 per sales order Customer-level costs $600 per customer per year Facility-level costs $60,000 per yearExplanation / Answer
1. Determine the minimum order size in sales dollars for Nielsen to break even on an order.
sale level cost per order/(commission per unit-unit level cost per unit)=300/(0.10-0.02)=3750 minimum order size.
b. Assuming an average customer places five orders per year, determine the minimum annual sales required to break even on a customer.
customer level cost /(commission per unit-unit level cost per unit)=(300 * 5 order per year)+600/0.10-0.02=26250
(c) What is the average order size in (b)?
26250/5=5250
d. Assuming Nielsen currently serves 100 customers, with each placing an average of five orders per year, determine the minimum annual sales required to break even.
Order level cost 300*5*100=150000
Customer level cost600*100=60000
Facility levle=60000
total cost= 270000
contribution ration 0.08
minimum annual sale=270000/0.08=3375000
(e) What is the average order size in (d)?
3375000/(5*100)=6750
F.:
Part (a) considers only order level costs while part (c) also considers customer level costs, and part (e) adds facility level costs. In order for a company to break even on an order, it need only cover order level costs. To break even on a customer, the company must cover order level and customer level costs. Finally, to achieve true break-even, all costs must be covered.
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