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Break-even analysis for a service company Rotelco is one of the largest digital wireless service providers...

Break-even analysis for a service company

Rotelco is one of the largest digital wireless service providers in the United States. In a recent year, it had approximately 100 direct subscribers (accounts) that generated revenue of $60,700. Costs and expenses for the year were as follows:

Cost of revenue $29,100
Selling, general, and administrative expenses 17,000
Depreciation 6,700

Assume that 65% 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 Rotelco's break-even number of accounts, using the data and assumptions above? Round to the nearest whole number.
accounts

b. How much revenue per account would be sufficient for Rotelco to break even if the number of accounts remained constant? Round to the nearest dollar.
$ per account

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Homework Answers

Answer #1

a. Revenue per account = $60700 / 100 = $607

Variable cost for 100 million subscribers = ($29100*65%) + ($17000*35%) = $24865

Fixed cost = ($29100*35%) + ($17000*65%) + $6700 = $27935

Variable cost per account = $24865 / 100 = $248.65

Contribution per account = $607 - $248.65 = $358.35

Rotelco's break even number of account = Fixed cost / contribution per account = $27935 / $358.35 = 78 accounts

b. If total number of account remained constant i.e. 100 then to break even, company needs to recover variable and fixed cost.

Therefore total required revenue to break even = $24865 + $27935 = $52800

Required revenue per account = $52800 / 100 = $528 per account

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