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 $33,700 million. Costs and expenses for the year were as follows:

Cost of revenue	$13,800
Selling, general, and administrative expenses	10,100
Depreciation	3,700

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).

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 $33,700 million. Costs and expenses for the year were as follows: Cost of revenue $13,800 Selling, general, and administrative expenses 10,100 Depreciation 3,700 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

a

Number of accounts = 100 million
Total sales = $33700 million
Sales per account = (Total sales / Number of accounts) = ($33700 million / 100 million) = $337

Variable cost = [(70% X Cost of revenue) + (30% X selling, general and administrative expenses)]
=> [(70% X $13800 million) + (30% X $10100 million)]
=> ($9660 million + $3030 million)
=> $12690 million
Variable cost per account = (Total variable cost / Number of accounts) = ($12690 million / 100 million) = $126.9 or $127

Fixed cost = [(30% X Cost of revenue) + (70% X selling, general and administrative expenses) + Full depreciation]
=> [(30% X $13800 million) + (70% X $10100 million) + $3700 million]
=> ($4140 + $7070 + $3700)million
=> $14910 million

Contribution margin = (Selling price per account - Variable cost per account)
=> ($337 - $127) = $210

Breakeven number of accounts = (Total Fixed cost / Contribution margin per unit)
=> ($14910 million / $210) = 71 million accounts

b

(We have to assume that selling 100 million accounts is the breakeven sales (units) for Rotelco)

Breakeven number of accounts = (Total Fixed cost / Contribution margin per unit)
=> 100 million accounts = $14910 million / (Selling price per account - $127)
=> (100 million accounts X Selling price per unit) - (100 million accounts X $127) = $14910 million
=> Selling price per unit = ($14910 million + $12700 million) / 100 million accounts
=> Selling price per unit = ($27610 million / 100 million accounts)
=> Selling price per unit = $276.1 or $276 revenue per account

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