Rotelco is one of the largest digital wireless service providers in the United S

Question

Rotelco is one of the largest digital wireless service providers in the United States. In a recent year, it had approximately 100 million direct subscribers (accounts) that generated revenue of $34,100 million. Costs and expenses for the year were as follows: Cost of revenue $15,700 Selling, general, and administrative expenses 9,900 Depreciation 3,800 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 Rotelco's break-even number of accounts, using the data and assumptions above? Round to the nearest whole number. million accounts b. How much revenue per account would be sufficient for Rotelco to break even if the number of accounts remained constant? Round to the nearest dollar. $ million per account

Explanation / Answer

Solution a:

Revenue per account = $34,100 / 100 = $341

Variable cost for 100 million subscribers = ($15,700*70%) + ($9,900*30%) = $13,960 million

Fixed cost = ($15,700*30%) + ($9,900*70%) + $3,800 = $15,440 million

Variable cost per account = $13,960 / 100 = $139.60

Contribution per account = $341 - $139.60 = $201.40

Rotelco's break even number of account = Fixed cost / contribution per account = $15,440 / $201.40 = 76.66 million account = 76663357 acccounts

Solution b:

If total number of account remained constant i.e. 100 million then to breakeven, company needs to recover variable and fixed cost.

Therefore total required revenue to break even = $13,960 + $15,440 = $29,400 million

Required revenue per account = $29,400 / 100 = $294 per account

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