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	$300 per sales order
Customer-level costs	$600 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

Answer 1

a. minimum order size in sales dollars for Jensen to break even on an order :

                Sales level cost / contribution margin ratio = 300 / ( 0.10 - 0.02) = .300 / .08 = 3750

b. minimum annual sales required to break even on a customer. :

[(sales level cost X Avg customer order per year) + customer level cost] / Contribution margin ratio

= [( 300 x 5) + 600 ] / 0.08

= 26250

c. . average order size in (b) = 26250 / 5 = 5250

PARTICULARS
order level cost ( 300 X 5 X 100)	150000
customer level cost (600 X 100)	60000
facility level cost	60000
Total cost	270000
Divide by Contribution margin ratio	0.08
minimum annual sales required to break even	3375000

  e. average order size in (d) = 3375000 / (100 x 5 ) = 6750