Break-even analysis for a service company Sprint Nextel is one of the largest di
ID: 2394590 • 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):
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?
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
Explanation / Answer
Answer
a )
Sales = $35,345 million
Total variable costs = [Cost of revenue × 70%] + [Selling general and administrative expenses × 30%]
= [$20,841 × 70%] + [$9,765 × 30%]
= $14,588.70 + $2,929.50
= $17,518.20 million
Total contribution margin = $35,345 - $17,518.20 = $17,826.80 million
Total fixed costs = [Cost of revenue × 30%] + [Selling, gen. and admin. expense × 70%] + Depreciation
= [$20,841 × 30%] + [$9,765 × 70%] + $2,239
= $6,252.3 + $6835.5 + $2,239
= $15,326.80 million
Break-even number of accounts = Total fixed costs / Contribution margin per unit
= $15,326.80 / $548.50
= 27.90 million
b)
total cost = cost of revenue + selling expenses + depreciation
= 20841 + 9765 + 2239
= 32845
break even revenue = total cost / number of direct subscribers
= 32845 / 32.5
= 1010.62 per account