Breakeven analysis application for Cisco using activity-based costing

Breakeven Analysis: Cisco Wireless Solutions

In this SLP, I will apply breakeven analysis to one of Cisco's Wireless Solutions for small business. The unit of measurement that we are looking at is the sale of individual Outdoor Wireless Access Points -- these devices allow companies to extend their wireless networking capabilities outdoors to courtyards, porches, balconies, and parks. Outdoor wi-fi access points have also been used by civic organizations to create "wireless clouds" in cities like Portland, OR and Atlanta, GA. The activity I am applying breakeven analysis to is a possible change of supplier for the weatherproof plastic casing of the outdoor access points. This change would reduce each unit's cost by $5.

As an example, the retail sale price of a Cisco 1310 Aironet Access Point is $849.00 through Tiger Direct. Fixed costs for this item would cover the. Variable costs would include electronic components, research and development, casing, packaging, and all associated manufacturing and transportation costs. Although the profit margin for consumer electronics is generally low, it may be higher in the case of enterprise-level electronics such as those Cisco manufactures.

I estimate the variable cost for each unit at roughly 40% of the retail price, or $340.00. In the current financial year, Cisco's Routers division brought in $5,367M in revenue -- roughly 17% of overall revenue. Making a conservative assumption that the router division's overhead is 20% of all operations-related overhead in FY11 yields an estimate of current total costs in that division of $394.6M (Cisco, 2011).

According to the equation for breakeven points, several variables must be defined. I will use 1 to denote the current cost breakdown and 2 to denote the projected cost breakdown after the change in the casing manufacturer.

P = Unit sale price = $850.00

V1 = Unit variable cost = $170.00

V2 = $165.00

TFC = Total fixed costs = $394,600,000.00