Question

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

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

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

(f) Choose the correct answer: "Explain the differences in the answers to (a), (c), and (e)?"

- 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

- Even if individual orders have a positive contribution, some customers may be unprofitable

Answer 1

Answer Pageino ① Minimum oorden sige = x = sales level cosf + (unit lowel cast xx) x = $100 + $0.00% 2-0.02% - 100 211-0.08) = 100 e 100 = 102.04 quire to brcals even on a customer а и и ска , Մնռան ձմ ААГАА Minimum order sige exo $1021041 Perimum annual se required to be at even on a customer Minimum annual sales to a customer = y = customer level cost + Cto. of orders * caeles favel.cont) + Conit level corf xy) Y =. 800.(4x$100) +(40-00Y) (6. do golen) 4-0024 = 800 + 400 0.984 = 1200 Y = 1024.49

ANGELO Page No ③ 1.: Minimum annual sales required to break even on a customer Y = $1224049 © de mensagens anden Average order sige - Y Nougl orders 1224149 3 306.12 ii Average ooider size = $306:12 Minimum seles equired to break even Minimum sales regard to break even = 7 = facility level corsets + [ couf of customer level x No of customers) + . (sales level cont į No of customens X No. of orders) .& conit level cost & 2) 7 = 60,000 + ($800 X160) + (100 x 100 X 48 +(0.027 2 - 0.02Z = 60,000 + 80,000 + 40000

Page No ③ 0.98 Z = 180.000 z = 180.000 0.98 = $1836–3:47 T ki Minimum sales required to break even = 7 - $183673.47 Average order for f18367347 Average order for $183673:47= Average annual sales - (No of customers x No. of orders) 183673.47 100 x 4 183673.47 400 = 459.18 .: Average order for $183643:47 - $459.18