Break-even analysis for a service company Sprint Nextel is one of the largest di
ID: 2559553 • 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
Margin of Safety
a. If Canace Company, with a break-even point at $960,000 of sales, has actual sales of $1,200,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales? Round the percentage to the nearest whole number.
1. $
2. %
b. If the margin of safety for Canace Company was 20%, fixed costs were $1,875,000, and variable costs were 80% of sales, what was the amount of actual sales (dollars)?
(Hint: Determine the break-even in sales dollars first.)
$
Explanation / Answer
Ans. 1. Calculation of Contribution (in Million)
Sales $ 35345
less: Variable cost
Cost of Revenue $14588.70
selling, general, and admn. $2929.50
Contribution 17826.80
P/v Ratio 50.44
Calculation of fixed cost
Depreciation $2239
cost of revenue (20841X.30) $6253.30
Sellingg, and general (9765X.30) $6835.50
Total fixed exp. $15327.80 Million
Selling value per account = $35345 Million/ 32.50 Million = $1087.54 Million
Break even point = $15327.80/.5044 = $30388.18 Million
Break even point in no of accounts = $30388.18/1087.54 = 27.94 million
Margin of Safety = $35345-30388.18= $4956.82
2. a. Canace company break even point $960000 and actual sales $1200000
Margin of safety = Actual sales-Break even sales
Margin of safety = 1200000-960000= $240000
% of margin of safety = $240000/$1200000= 20%
b. Margin of safety for canace company was 20%, fixed cost were $1875000
Variable cost were 80% of sales
P/V ratio (100-80) = 20%
BEP sales = $1875000/.20 = $9375000
Margin of safety is 20% that means Break even sales is 80%
Actual Sales is = $9375000/.80 = $11718750