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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 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
Deprecation 2239

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).

  1. 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.
  2. 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

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.

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

b.

To determine

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

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