Rotelco is one of the largest digital wireless service providers in the United States. In a...
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 $29,200 million. Costs and expenses for the year were as follows:
| Cost of revenue | $12,300 | |
|
$8,800 | |
|
$3,200 |
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
Homework Answers
a.
Total fixed cost should be divided by contribution per unit to get the BE number.
Total fixed cost = (100% - 70%) of cost of revenue + (100% - 30%) of selling expenses + Depreciation
= 30% × $12,300 + 70% × $8,800 + $3,200
= 3,690 + 6,160 + 3,200
= $13,050 million
Total variable cost = 70% of cost of revenue + 30% of selling expenses
= 70% × $12,300 + 30% × $8,800
= 8,610 + 2,640
= $11,250 million
Total contribution = Total revenues – Total variable cost
= 29,200 – 11,250
= $17,950 million
Contribution per unit = Total contribution / Number of accounts
= $17,950 million / 100 million
= $179.50
BE number = Total fixed cost / Contribution per unit
= $13,050 million / $179.50
= 72.70194 ……. million
= 73 million (rounded to whole number)
Answer: 73
b.
Let the required revenue per account is $X.
Now, as per the BE formula the following formula is set:
Total revenue – Total variable cost = Total fixed cost
($X × 100 million) - $11,250 million = $13,050 million
$100X million = $13,050 million + $11,250 million
$100X million = $24,300 million
X = $24,300 million / 100
= $243 million
Answer: 243
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