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Sprint Nextel is one of the largest digital wireless service providers in the United States
Sprint Nextel is one of the largest digital wireless service providers in the United States. In a recent year, it had approximately 36.7 million direct subscribers (accounts) that generated revenue of $35,635 million. Costs and expenses for the year were as follows (in millions):
| Cost of revenue | $16,746 |
| Selling, general, and administrative expenses | 11,355 |
| Depreciation | 5,953 |
Assume that 80% 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 Sprint Nextel's break-even number of accounts, using the data and assumptions above? Round units (accounts) to one decimal place.
Expert Solution
Computation of Break-even Number of Accounts:
Break-even Number of Accounts = Total Fixed Cost/Contribution Margin per Account
= 17250.7/513.1
Break-even Number of Accounts = 33.6 million accounts
Workings:
Cost of Revenue:
Variable = 80% * 16746 = $13,396.8
Fixed = 20% * 16746 = $3,349.2
Selling, general, and administrative expenses:
Variable = 30% * 11355 = $3406.5
Fixed = 70% * 11355 = $7948.5
Depreciation (All Fixed) = $5953
Total Variable costs = 13396.8 + 3406.5 = $16803.3
Total Fixed Costs = 3349.2 + 7948.5 + 5953 = $17250.7
Revenue per Account = $35,635/36.7 = $971.0
Variable cost per accounts = 16803.3/36.7 = $457.9
Contribution per Accounts = Revenue per Account - Variable cost per Account = 971 - 457.9 = $513.1
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