Question

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 $50,200. Costs and expenses for the year were as follows:

Cost of revenue	$22,100
Selling, general, and administrative expenses	13,600
Depreciation	5,500

Assume that 60% 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

Answer 1

a)	Break even number of units =			Total Fixed Cost / Cont. Margin per unit
			=	$ 19740 / $ 288.40
			=	68	accounts
b)	Revenue per account required =			$       288

Workings:

				Amount	Per Unit
	Revenue			$ 50,200.00	$ 502.00
Less:	Variable Costs
	Cost of revenue			$ 13,260.00	$ 132.60
	($ 22100 x 60%)
	SG&A			$   8,100.00	$    81.00
	($ 13500 x 60%)
		Contribution Margin		$ 28,840.00	$ 288.40
	Fixed Costs
	Cost of revenue			$   8,840.00
	($ 22100 x 40%)
	SG&A			$   5,400.00
	($ 13500 x 40%)
	Depreciation			$   5,500.00
		Total Fixed Cost		$ 19,740.00
		Operating Income		$   9,100.00