Media outlets often have web sites that provide in-depth coverage of news and ev

Question

Media outlets often have web sites that provide in-depth coverage of news and events 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, one outlet spent $3,350,160 on a promotional campaign for its web site, offering two free months of service for new subscribers. In addition, assume the following information . Portions of these web sites are restricted to members who pay a monthly subscription to gain 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 20 months $28 $9 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

(1) Fixed cost = Cost of promotional campaign = $3,350,160

(2) Unit Contribution Margin = Revenue per account - Variable cost per account = 28-9 = $19

Break even point in units = Fixed cost ÷ Unit Contribution Margin = 3,350,160÷19 = 176,324 units

Number of new customer accounts needed to break even = 176,324 customers.

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