Question

Cost of revenue $20,841 Selling, general, and administrative expenses 9,765 Depreciation 2,239 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). In part (a) and (b), round all interim calculations and final answers to one decimal place.

Answer 1

You forgot to put the beginning portion of the questions and both questions for part (a) and (b), so I will state the parts you missed and then answer the question with details.

The missing portion of the question is:

Sprint Nextel is one of the largest digital wireless service providers in the United States. In a recent year, it had approximately 32.5 million direct subscribers (accounts) that generated revenue of $35,345 million.

(a) What is Sprint Nextel's break-even number of accounts, using the data and assumptions given?

(b) How much revenue per account would be sufficient for Sprint Nextel to break even if the number of accounts remained constant?

Step-by-step detailed answer:

(a) Calculation of break-even point in number of accounts:

We need to know that :

Break-even point = Fixed costs / contribution margin per unit

So we need to calculate the following:

Selling price per unit = total sales revenue / number of accounts = $35,345 million / 32.5 million = $1,087.53

Variable cost per unit = Total variable cost / number of accounts = $17,518.20 million / 32.5 million = $539.02

Contribution margin per unit = selling price per unit - variable cost per unit = $1,087.53 - $539.02 = $548.51

Thus, we have that:

Break-even point = $15,326.80 million / $548.51 = $27.9 million

Answer to part (a):

Sprint Nextel's break-even number of accounts, using the data and assumptions given is $27.9 million

(b) Revenue per account to break-even:

If the number of accounts remains constant at 32.5 million, then the revenue per account to break-even should equal to the variable cost per unit and the fixed cost per unit.

So, we have that:

Fixed cost per unit at 32.5 million account = $15,326.80 million / 32.5 million = $471.59

Thus, we get:

revenue per account to break-even = $539.02 + $471.59 = $1,010.6 per account

Therefore, at 32.5 million accounts generating a revenue of $1,010.6 per account, the company revenue would equal the total cost and hence there would be no profit or loss to the company.

Answer to part (b):

$1,010.6 per account would be sufficient for Sprint Nextel to break even if the number of accounts remained constant