Problem - Multiple-Level Break-Even Analysis
Jensen Associates provides marketing services for a number of small manufacturing firms. Jensen receives a commission of 10 percent of sales. Operating costs are as follows:
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Unit-level costs
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$ 0.04 per sales dollar
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Sales-level costs
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$ 300 per sales order
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Customer-level costs
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$ 900 per customer per year
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Facility-level costs
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$ 60,000 per year
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(a) Determine the minimum order size in sales dollars for Jensen 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 Jensen 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) Explain the differences in the answers to (a), (c), and (e).
In the long-run the most important costs are facility level costs. The most important costs to cover are unit level costs. 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.