Reference no: EM133272749

Cisco Technologies, a manufacturer of telecommunication equipment, incurred a larger-than- expected loss for the fourth quarter. Cisco management had expected the company to begin breaking even by the end of the current financial year but now estimates to break even sometime in the next financial year.

The company, which has suffered from a collapse in telecommunications spending, has struggled through 3 consecutive quarters of losses. The reason for the current quarter's loss is that revenues are 18% less than they were in the third quarter. According to Cisco's chief financial officer, the revenue shortfall is due to spending cuts by major wireless carriers and an unexpected delay in a network contract.

Cisco management is struggling to reduce its break-even point which is currently $240 million. One way to accomplish that goal is through further job cuts. The number of employees at Cisco was 16,000 at one time;now, that number is being slashed to 5,000. The company may be forced to rethink its strategy of being a wide-ranging equipment supplier. Because of consecutive quarterly losses, the announcement of the current quarter's expected loss, and the extension of the break-even target date, rating agencies have threatened to further downgrade the company's credit rating, which is already at B-minus.

1. Explain how an understanding of the distinction between fixed cost and variable cost can be useful to managers for decision-making.

2. What is meant by the term "break-even point"? How is the break-even point computed?

3. Cisco experienced an 18% drop in quarterly revenues. What effect does this expected drop in revenues have on the break-even point?

4. The lowered revenue forecast raises the risk of further job cuts at Cisco. What effect will job cuts have on the break-even point?

5. Explain how Cisco could lower its break-even point.