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Break even analysis for a service company 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. Costs and expenses for the year were as follows (in millions): 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). A. What is Sprint Nextel’s break-even number of accounts, using the data and assumptions given? Round units (accounts) and per-account amounts to one decimal place. B. How much revenue per account would be sufficient for Sprint Nextel to break even if the number of accounts remained constant?

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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307

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Section
BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307
Chapter 19, Problem 19.16EX
Textbook Problem
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Break even analysis for a service company

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. Costs and expenses for the year were as follows (in millions):

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).

A. What is Sprint Nextel’s break-even number of accounts, using the data and assumptions given? Round units (accounts) and per-account amounts to one decimal place.

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

A.

To determine

Break-even Analysis: It refers to an analysis of the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit

To compute: Company SN’s break-even number of accounts.

Explanation of Solution

Compute the Company SN’s break-even number of accounts.

Fixed cost =$15,326.8 million (refer Table 2)

Contribution margin per account =$548.5 per million account (1)

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit=$15,326.8million$548.5permillionaccount=27.9millionaccounts

Working notes:

Determine the total variable cost.

ParticularsTotal cost (A)Variable cost percentage (B)Variable cost (A×B)
Cost of revenue$20,84170%$14,588.7
Selling, general, administration expense$9,76530%$2,929.5
Total variable cost  $17,518.2

Table (1)

Determine the total fixed cost.

ParticularsTotal cost (A)Fixed cost percentage (B)Fixed cost (A×B)
Cost of revenue$20,84130%$6,252.3
Selling, general, administration expense$9,76570%$6,835.5
Depreciation$2,239100%$2,239.0
Total fixed cost  $15,326.8

Table (2)

Determine the selling price per unit and the variable cost per unit

B.

To determine

To compute: the revenue per account for break-even if the number of accounts remains constant.

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Chapter 19 Solutions

Financial & Managerial Accounting
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