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	$200 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.
$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).

In multiple customer firms the break-even point decreases as the number of customers increases.

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

In the long-run the most important costs are facility level costs.

The most important costs to cover are unit level costs.

Answer 1

(a) Determine the minimum order size in sales dollars for Nielsen to break even on an order.
An order involves 2 following direct cost associated with it
Unit-level costs
Sales-level costs
To break even it should cover above two costs
Lets assume X is the minimum order size
X = $200 + $0.02X
0.98 X = 200
X = $200/0.98
Minimum Order Size	$                                         204.08
(b) Assuming an average customer places five orders per year, determine the minimum annual sales required to break even on a customer
Costs associated with a customer involves following costs
Unit-level costs	$0.02 per sales dollar
Sales-level costs	$200 per sales order
Customer-level costs	$800 per customer per year
Lets assume that X is the minimum annual sales to a customer
X = 800 + 5*200 + 0.02*X
0.98X = 1800
X = 1800/0.98	$                                     1,836.73
Minimum annual sales required to break even on a customer	$                                     1,836.73
(c) What is the average order size in (b)?
Average order size in (b) = Minimum annual sales required to break even on a customer/ Average orders placed by a customer
=1836.73/5
$                                                         367.35
(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.
Costs associated with a customer involves following costs
Unit-level costs	$0.02 per sales dollar
Sales-level costs	$200 per sales order
Customer-level costs	$800 per customer per year
Facility-level costs	$60,000 per year
Lets assume Y is Minimum annual sales required to break even
Y = 60,000 + 800*100 + 200*100*5 + 0.02*Y
0.98Y = 240000
Y = 240000/0.98
Minimum annual sales required to break even	$                                 244,897.96
(e) What is the average order size in (d)?
Average Order size = Average Annual Sales/Number of orders
=244,897.96/(100*5) = $48,979.6

f. The difference in answers is due to multiple level break even like cost centre accounting and the total cumulative cost is in last part.