Question

Rotelco is one of the largest digital wireless service providers in the United States. In a recent year, it had approximately 100 million direct subscribers (accounts) that generated revenue of $43,500 million. Costs and expenses for the year were as follows:

Cost of revenue	$20,900
Selling, general, and administrative expenses	12,200
Depreciation	4,800

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).

a. What is Rotelco's break-even number of accounts, using the data and assumptions above? Round to the nearest whole number.
million 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.
$ million per account

Answer 1

Solution a:

Revenue per account = $43,500 / 100 = $435

Variable cost for 100 million subscribers = ($20,900*70%) + ($12,200*30%) = $18,290 million

Fixed cost = ($20,900*30%) + ($12,200*70%) + $4,800 = $19,610 million

Variable cost per account = $18,290 / 100 = $182.9

Contribution per account = $435 - $182.9 = $252.1

Rotelco's break even number of account = Fixed cost / contribution per account = $19,610 / $252.1 = 77.78 million account = 77786592 accounts

Solution b:

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

Therefore total required revenue to break even = $18,290 + $19,610 = $37,900 million

Required revenue per account = $37,900 / 100 = $379 per account