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Nielsen Associates provides marketing services for a number of small manufacturing firms. Nielsen receives a commission...

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.

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

(c) What is theaverage order size in (b)?

(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.

Expert Solution

SOLUTION

(A) 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) 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) 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 = 240,000

Y = 240,000/0.98

Minimum annual sales required to break even = $244,897.96

ekkarill92 answered 1 year ago

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