A cell phone company has a fixed cost of $1,000,000 per month and a variable cos

Question

A cell phone company has a fixed cost of $1,000,000 per month and a variable cost of $20 per month per subscriber. The company charges $29.95 per month to its cell phone customers. (2.2) a. What is the breakeven point for this company? b. The company currently has 95,000 subscribers and proposes to raise its monthly fees to $39.95 to cover add-on features such as text messaging, song downloads, game playing, and video watching. What is the new breakeven point if the variable cost increases to $25 per customer per month? c. If 20,000 subscribers will drop their service because of the monthly fee increase in Part (b), will the company still be profitable?

Explanation / Answer

a. breakeven point = 1,000,000/(29.95-20) =100502.51 b. new breakeven point = 1,000,000/(39.95-25) =66889.63 c. no of prescribers after increase in fee = 95000-20000= 75,000 75,000 is greater than the new breakeven point. hence the company will still be profitable

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