Break-Even Analysis Sprint Nextel is one of the largest digital wireless service

Question

Break-Even Analysis

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):

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). In part (a) and (b), round all interim calculations and final answers to one decimal place.

a. What is Sprint Nextel's break-even number of accounts, using the data and assumptions given?
____ million accounts

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

Cost of revenue $20,841 Selling, general, and administrative expenses 9,765 Depreciation 2,239

Explanation / Answer

a. Break-even number of accounts should be computed by dividing the total fixed costs by contribution margin per unit.

Compute the contribution margin per unit as follows:

Sales = $35,345 million

Total variable costs = [Cost of revenue × 70%] + [Selling general and administrative expenses × 30%]

= [$20,841 × 70%] + [$9,765 × 30%]

= $14,588.70 + $2,929.50

= $17,518.20 million

Therefore,

Total contribution margin = $35,345 - $17,518.20 = $17,826.80 million

Now, total contribution margin is $17,826.80 and the number of accounts is 32.5. Therefore, contribution margin per unit will be $548.50 ($17,518.80 / 32.5).

Compute total fixed costs as follows:

Total fixed costs = [Cost of revenue × 30%] + [Selling, gen. and admin. expense × 70%] + Depreciation

= [$20,841 × 30%] + [$9,765 × 70%] + $2,239

= $6,252.3 + $6835.5 + $2,239

= $15,326.80 million

Compute break-even number of accounts as follows:

Break-even number of accounts = Total fixed costs / Contribution margin per unit

= $15,326.80 / $548.50

= 27.90 million

b.

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