Question

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 Depreciation 2,239 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? b. How much revenue per account would be sufficient for Sprint Nextel to break even if the number of accounts remained constant?

Answer 1

a)

Break-even number of accounts = Total Fixed Costs / (Revenue Per Account – Variable Cost per Account)

= $15,326.80 / (1,087.54 – 539.02)

= $15,326.80 / 548.52

= 27.94 million accounts or 27.9 million accounts

b)

Break-even (in $ revenue, in millions) = Total Costs / Divided by number of accounts

= $32,845 / 32.5

= $1,010.61

Variable Cost Percentage = Variable Cost per account / Revenue per account x 100

= 539.02 / 1087.54 x 100

= 49.56%

Supporting calculations:

Revenue Per Account (in millions):
Total Revenue (in million)	$35,345
Total accounts (in millions)	32.5
Revenue per account (in millions)	$1,087.54
Variable cost per account (in millions):
Cost of revenue (in millions) (20,841*70%)	$14,588.70
Selling, gen., admin. exp. (in millions) (9,765*30%)	$2,929.50
Total variable costs	$17,518.20
Divided by number of accounts	32.50
Variable cost per account (in millions)	$539.02
Total fixed costs (in millions):
Cost of revenue (in millions) (20,841*30%)	$6,252.30
Selling, gen., admin. exp. (in millions) (9,765*70%)	$6,835.50
Depreciation	$2,239.00
Total fixed costs (in millions)	$15,326.80

Note ---- I have considered two decimal places in intermediate calculation and rounded off final answer to 1 decimal place...In case any change, please modify the answer accordingly or advise me, i will the updated answer according to the decimal places..