Break-Even Analysis Media outlets such as ESPN and Fox Sports often have web sit
ID: 2562992 • Letter: B
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 $4,402,280 on a promotional campaign for its web site, offering 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 Costs that tend to remain the same in amount, regardless of variations in the level of activity.fixed cost, and (2) treat the revenue less Costs that vary in total dollar amount as the level of activity changes.variable cost per account for the subscription period as the The dollars available from each unit of sales to cover fixed costs and provide income from operations.unit contribution margin.
Number of months an average new customer stays with the service (including the two free months) 18 months Revenue per month per customer subscription $32 Variable cost per month per customer subscription $11Explanation / Answer
Revenue per month per customer subscription $32 per month Variable cost per month per customer subscription $11 per month As two month trial is given and customer stays for average 18 months in service Therefore, contribution earned per new customer is: Revenue collected for 16 months (18- 2 for free trial)@32 512 Variable cost for whole 18 months @11 198 Contribution earned per new customer 314 Req (1) Total promotional Campiagn cost $ 4402,280 Therfore, new customer to subscribe for break even: New customer to subscribe for service= Total Promotional cost / Contribution per new customer ( 4402,280 / 314) = 14,020 new customers Req (2) Contribution earned per customer: As two month trial is given and customer stays for average 18 months in service Therefore, contribution earned per new customer is: Revenue collected for 16 months (18- 2 for free trial)@32 512 Variable cost for whole 18 months @11 198 Contribution earned per new customer 314