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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?
Financial & Managerial Accounting
Solutions
Financial & Managerial Accounting
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.
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:
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)
Working notes:
Determine the total variable cost.
| Particulars | Total cost (A) | Variable cost percentage (B) | Variable cost (A×B) |
| Cost of revenue | $20,841 | 70% | $14,588.7 |
| Selling, general, administration expense | $9,765 | 30% | $2,929.5 |
| Total variable cost | $17,518.2 |
Table (1)
Determine the total fixed cost.
| Particulars | Total cost (A) | Fixed cost percentage (B) | Fixed cost (A×B) |
| Cost of revenue | $20,841 | 30% | $6,252.3 |
| Selling, general, administration expense | $9,765 | 70% | $6,835.5 |
| Depreciation | $2,239 | 100% | $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 compute: the revenue per account for break-even if the number of accounts remains constant.
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