Break-Even Analysis Media outlets such as ESPN and Fox Sports often have website
ID: 2375679 • Letter: B
Question
Break-Even Analysis
Media outlets such as ESPN and Fox Sports often have websites that provide in-depth coverage of news and events. Portions of these websites are restricted to members who pay a monthly subscription to gain access to exclusive news and commentary.
These websites typically offer a free trial period to introduce viewers to the website. Assume that during a recent fiscal year, ESPN.com spent $3,150,000 on a promotional campaign for the ESPN.com website that offered two free months of service for new subscribers. In addition, assume the following information:
Determine the number of new customer accounts needed to break even on the cost of the promotional campaign. In forming your answer, (1) treat the cost of the promotional campaign as a fixed cost, and (2) treat the revenue less variable cost per account for the subscription period as the unit contribution margin.
Explanation / Answer
Fixed costs divided by the unit contribution margin equals break-even point.
The fixed cost is the cost of the promotion. Unit contribution is revenue times the subscription months minus the two free months AND the variable cost times the full 23 months.
3,150,000 / (15*21) - (5*23) =15,750