Break-Even Analysis Media outlets such as ESPN and Fox Sports often have web sit

Question

Break-Even Analysis Media outlets such as ESPN and Fox Sports often have web sites that provide in-depth coverage of news and events. Portions of these web sites are restricted to members who pay a monthly subscription to gain access to exclusive news and commentary These web sites typically offer a free trial period to introduce viewers to the web site. Assume that during a recent fiscal year, ESPN.com spent $4,200,000 on a promotional campaign for the ESPN.com web site that offered two free months of service for new subscribers. In addition, assume the following information: Number of months an average new customer stays with the service (including the two free months) Revenue per month per customer subscription Variable cost per month per customer subscription 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. 14 months $10.00 $5.00 accounts

Explanation / Answer

Solution:

Revenue per month per customer subscription = $10

Number of months an average new customer stays with the service (Including 2 free months) = 14 months

Revenue per customer account = $10 * 12 = $120

Varaiable cost per month per customer subscription = $5

Varaible cost per customer account = $5*14 = $70

Contribution per customer accounts = $120 - $70 = $50 per customer account

Cost of promotional compaign = $4,200,000

Number of new customer accounts needed to breakeven on the cost of promotional compaign = Fixed cost / Contribution per customer account

= $4,200,000 / $50 = 84000 customer accounts

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