Break-even analysis for a service company Sprint Nextel is one of the largest di
ID: 2525971 • Letter: B
Question
Break-even analysis for a service company Sprint Nextel is one of the largest digital wireless service providers in the United States. In a recent year, it had approximately 32.5 million direct subscribers (accounts) that generated revenue of $35,345 million. Costs and expenses for the year were as follows (in millions): $20,841 9,765 2,239 Cost of revenue Selling, general, and administrative expenses Depreciation Assume that 70% of the cost of revenue and 30% of the selling, general, and administrative expenses are variable to the number of direct subscribers (accounts). In part (a) and (b), round all interim calculations and final answers to one decimal place. a. What is Sprint Nextel's break-even number of accounts, using the data and assumptions given? 27.9 million accounts b. How much revenue per account would be sufficient for Sprint Nextel to break even if the number of accounts remained constant? million per account Feedback Check My Work a. Fixed costs divided by unit contribution margin equals break-even point in units b. Fixed costs divided by X -variable costs equals number of subscribers. Solving for X will result in the break-even revenue per account. Learning Objective 3.Explanation / Answer
Answers
Total
Variable Cost
Fixed Cost
Cost of Revenues
$20841
14588.7
6252.3
Selling, General and Administrative expenses
$9765
2929.5
6835.5
Depreciation
$2239
2239
Total
$32845 million
$17518.2 millions
$15326.8 millions
No. of subscribers
32.5 millions
Variable cost per subscriber
$539
Revenue
$35345 millions
No. of subscribers
32.5 millions
Revenue per subcriber
$1087.5
(-) variable cost per subcriber
$539
Contribution margin per Subcriber
$548.5
Fixed cost [total] (A)
$15326.8 millions
Contribution margin per Subcriber (B)
$548.5
Break Even number of accounts (A/B)
27.9 millions
Let the revenue per account be ‘x’, then
Revenue
32.5x million
(-) Variable cost
17518.2 million
Contribution margin
(32.5x - 17518.2) millions
(-) Fixed Cost
15326.8 millions
Net Income will be ‘zero’ at Break Even
0
Equation = 32.5x - 17518.2 - 15326.8 = 0
32.5x - 32755 = 0
32.5x = 32755
x = 32755 / 32.5
x = 1007.8
Answer: revenue per account = $1007.8
Total
Variable Cost
Fixed Cost
Cost of Revenues
$20841
14588.7
6252.3
Selling, General and Administrative expenses
$9765
2929.5
6835.5
Depreciation
$2239
2239
Total
$32845 million
$17518.2 millions
$15326.8 millions
No. of subscribers
32.5 millions
Variable cost per subscriber
$539
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