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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Break-even analysis

Media outlets such as ESPN and Fox Sports often have websites that provide in-depth coverage of news and events. Portions of these websites are restricted to members who pay a monthly subscription to gain access to exclusive news and commentary. These websites typically offer a free trial period to introduce viewers to the site. Assume that during a recent fiscal year, ESPN.com spent $4,200,000 on a promotional campaign for the ESPN .com website that offered two free months of service for new subscribers. In addition, assume the following Information:

Number of months an average new customer stays with the service (including the two free months) 14 months
Revenue per month per customer subscription $10.00
Variable cost per month per customer subscription $5.00

Determine the number of new customer accounts needed to break even on the cost of the promotional campaign. In forming your answer, (1) treat the cost of the promotional campaign as a fixed cost and (2) treat the revenue less variable cost per account for the subscription period as the unit contribution margin.

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: the number of new customer accounts needed to break even on the cost of the promotional campaign.

Explanation

Compute the number of new customer accounts needed to break even on the cost of the promotional campaign.

Fixed cost (cost of the promotional campaign) =$4,200,000

Contribution margin per unit =$5 per unit (1)

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit=$4,200,000$50peraccount=84,000accounts

Working notes:

Determine the contribution margin per unit.

Selling price per account (revenue per account) =$120 per account (2)

Variable cost per account =$70 per account (3)

ContributionMarginperunit]=(Sellingpriceperunit)(Variablecostperunit)=$120peraccount$70peraccount=$50peraccount (1)

Determine the revenue per customer account.

Number of months of service availed by a new customers =14 months

Number of months of free service provided =2 months

Revenue per month per customer subscription =$10

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